================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
----------
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number: 000-24838
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MATTSON TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0208119
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
47131 Bayside Parkway, Fremont, California 94538
(Address of principal executive offices) (Zip Code)
(510) 657-5900
(Registrant's telephone number, including area code)
----------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes |X| No [ ]
Number of shares of common stock outstanding as of November 1, 2004:
51,435,339.
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MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
----------
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets --
at September 26, 2004 and December 31, 2003.................. 3
Condensed Consolidated Statements of Operations -- for
the Three and Nine Months Ended September 26, 2004
and September 28, 2003....................................... 4
Condensed Consolidated Statements of Cash Flows -- for
the Nine Months Ended September 26, 2004 and
September 28, 2003........................................... 5
Notes to Condensed Consolidated Financial Statements........... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 19
Item 3. Quantitative and Qualitative Disclosures
About Market Risk............................................ 36
Item 4. Controls and Procedures........................................ 37
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 39
Item 6. Exhibits...................................................... 39
Signatures.............................................................. 40
2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
September 26, December 31,
2004 2003
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents ...................................................... $ 80,489 $ 77,115
Restricted cash ................................................................ 510 509
Accounts receivable, net ....................................................... 62,676 34,260
Advance billings ............................................................... 14,293 20,684
Inventories .................................................................... 51,688 27,430
Inventories - delivered systems ................................................ 4,966 6,549
Prepaid expenses and other assets .............................................. 15,480 12,995
--------- ---------
Total current assets ......................................................... 230,102 179,542
Property and equipment, net .......................................................... 23,323 16,211
Goodwill ............................................................................. 8,239 8,239
Intangibles .......................................................................... 1,641 2,626
Other non-current assets ............................................................. 1,142 769
--------- ---------
Total assets ................................................................. $ 264,447 $ 207,387
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................... $ 24,395 $ 21,340
Accrued liabilities ............................................................ 55,507 62,608
Deferred revenue ............................................................... 32,132 38,680
--------- ---------
Total current liabilities .................................................... 112,034 122,628
--------- ---------
Long-term liabilities:
Deferred income taxes .......................................................... 623 1,055
--------- ---------
Total long-term liabilities .................................................. 623 1,055
--------- ---------
Total liabilities ............................................................ 112,657 123,683
--------- ---------
Commitments and contingencies (Note 14)
Stockholders' equity:
Common stock ................................................................... 50 45
Additional paid-in capital ..................................................... 593,584 546,099
Accumulated other comprehensive income ......................................... 9,192 9,468
Treasury stock ................................................................. (2,987) (2,987)
Accumulated deficit ............................................................ (448,049) (468,921)
--------- ---------
Total stockholders' equity ................................................... 151,790 83,704
--------- ---------
Total liabilities and stockholders' equity ................................... $ 264,447 $ 207,387
========= =========
See accompanying notes to condensed consolidated financial
statements (unaudited).
3
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
September 26, September 28, September 26, September 28,
2004 2003 2004 2003
--------- --------- --------- ---------
Net sales ...................................................... $ 68,038 $ 32,633 $ 181,314 $ 130,926
Cost of sales .................................................. 37,247 19,886 102,112 87,495
--------- --------- --------- ---------
Gross profit ............................................. 30,791 12,747 79,202 43,431
--------- --------- --------- ---------
Operating expenses:
Research, development and engineering .................... 5,616 4,483 15,970 18,716
Selling, general and administrative ...................... 14,956 12,638 41,299 42,309
Amortization of intangibles .............................. 328 328 985 1,823
Restructuring and other charges .......................... -- 489 -- 489
--------- --------- --------- ---------
Total operating expenses ............................... 20,900 17,938 58,254 63,337
--------- --------- --------- ---------
Income (loss) from operations .................................. 9,891 (5,191) 20,948 (19,906)
Loss on disposition of Wet Business ............................ -- -- -- (10,257)
Interest and other income:
Interest income .......................................... 365 307 889 931
Interest expense ......................................... (22) -- (57) (107)
Other income (expense), net .............................. (36) 960 (600) 41
--------- --------- --------- ---------
Interest and other income, net ......................... 307 1,267 232 865
--------- --------- --------- ---------
Income (loss) before provision for (benefit from)
income taxes ............................................. 10,198 (3,924) 21,180 (29,298)
Provision for (benefit from) income taxes ...................... 1 (21) 308 142
--------- --------- --------- ---------
Net income (loss) .............................................. $ 10,197 $ (3,903) $ 20,872 $ (29,440)
========= ========= ========= =========
Net income (loss) per share:
Basic .................................................... $ 0.20 $ (0.09) $ 0.43 $ (0.66)
========= ========= ========= =========
Diluted .................................................. $ 0.20 $ (0.09) $ 0.41 $ (0.66)
========= ========= ========= =========
Shares used in computing net income (loss) per share:
Basic .................................................... 49,922 44,975 49,085 44,911
========= ========= ========= =========
Diluted .................................................. 51,051 44,975 50,588 44,911
========= ========= ========= =========
See accompanying notes to condensed consolidated financial
statements (unaudited).
4
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
----------------------------
September 26, September 28,
2004 2003
------------- -------------
Cash flows from operating activities:
Net income (loss) ............................................................................ $ 20,872 $(29,440)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
activities:
Depreciation ............................................................................... 3,877 4,820
Deferred taxes ............................................................................. (403) 477
Provision for excess and obsolete inventories .............................................. 348 --
Amortization of intangibles ................................................................ 985 1,823
Restructuring and other charges ............................................................ -- 489
Loss on disposal of Wet Business ........................................................... -- 10,257
Loss on disposal of property and equipment ................................................. 136 1,206
Changes in assets and liabilities, net of effect of disposition of the Wet
Business:
Accounts receivable, net .............................................................. (28,495) 15,396
Advance billings ...................................................................... 6,315 8,281
Inventories ........................................................................... (24,662) 7,421
Inventories, delivered systems ........................................................ 1,563 14,473
Prepaid expenses and other current assets ............................................. (2,610) (1,501)
Other assets .......................................................................... (512) 1,108
Accounts payable ...................................................................... 3,087 (6,044)
Accrued liabilities ................................................................... (7,050) (6,020)
Deferred revenue ...................................................................... (6,473) (32,076)
-------- --------
Net cash used in operating activities ............................................. (33,022) (9,330)
-------- --------
Cash flows from investing activities:
Proceeds from the disposition of Wet Business ................................................ -- 2,000
Purchases of property and equipment .......................................................... (10,923) (3,880)
-------- --------
Net cash used in investing activities ............................................. (10,923) (1,880)
-------- --------
Cash flows from financing activities:
Restricted cash .............................................................................. -- 597
Payments on line of credit and long-term debt ................................................ -- (335)
Borrowings against line of credit ............................................................ -- 1,397
Proceeds from issuance of common stock, net of costs ......................................... 46,370 91
Proceeds from issuance of common stock under stock plans ..................................... 1,119 305
-------- --------
Net cash provided by financing activities ......................................... 47,489 2,055
-------- --------
Effect of exchange rate changes on cash and cash equivalents ....................................... (170) 4,272
-------- --------
Net increase (decrease) in cash and cash equivalents ............................................... 3,374 (4,883)
Cash and cash equivalents, beginning of period ..................................................... 77,115 87,879
-------- --------
Cash and cash equivalents, end of period ........................................................... $ 80,489 $ 82,996
======== ========
See accompanying notes to condensed consolidated financial
statements (unaudited).
5
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 26, 2004
(unaudited)
Note 1 -- Basis of Presentation
Overview
The accompanying interim unaudited condensed consolidated financial
statements as of September 26, 2004 and December 31, 2003 and for the three and
nine months ended September 26, 2004 and September 28, 2003 have been prepared
by Mattson Technology, Inc. and its subsidiaries (the "Company" or "Mattson") in
accordance with generally accepted accounting principles in the United States of
America ("United States" or "U.S.") for interim financial information and with
the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. All
intercompany accounts and transactions have been eliminated in consolidation.
The condensed consolidated balance sheet as of December 31, 2003 has been
derived from the audited financial statements as of that date, but does not
include all disclosures required by generally accepted accounting principles.
The accompanying financial statements should be read in conjunction with the
audited financial statements included in the Company's Annual Report on Form
10-K for the year ended December 31, 2003.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Estimates are used for, but
are not limited to, the accounting for the allowance for doubtful accounts,
inventory reserves, depreciation and amortization periods, asset impairment
analyses, sales returns, accrued liabilities, warranty costs and income taxes.
Actual results could differ from these estimates.
The results of operations for the three and nine months ended September
26, 2004 are not necessarily indicative of results that may be expected for
future quarters or for the entire year ending December 31, 2004.
Restricted Cash
Restricted cash represents cash that has been set aside in accordance with
an agreement with the Company's commercial bank that is responsible for issuance
of travel and corporate credit cards. As of September 26, 2004, restricted cash
of approximately $0.5 million was maintained with the commercial bank.
Restricted cash is classified in current assets on the condensed consolidated
balance sheet.
Recent Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") issued an exposure draft
entitled Share-Based Payment, an Amendment of FASB Statements Nos. 123 and 95.
This exposure draft would require stock-based compensation to employees to be
recognized as a cost in the financial statements and require that such cost be
measured according to the fair value of the stock compensation. In the absence
of an observable market price for the stock awards, the fair value of the stock
rights or stock options would be based upon a valuation methodology that takes
into consideration various factors, including the exercise price of the right or
option, the expected term of the option, the current price of the underlying
shares, the expected volatility of the underlying share price, the expected
dividends on the underlying shares and the risk-free interest rate. The proposed
requirements in the exposure draft would be effective for the first fiscal year
beginning after June 15, 2005. The FASB has announced that it intends to issue a
final Statement in late 2004. The Company continues to monitor communications on
this subject from the FASB in order to determine the impact on its consolidated
financial statements.
Stock-Based Compensation
The Company accounts for its stock-based employee compensation plans under
the recognition and measurement principles of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations. No stock-based employee compensation cost is reflected in net
income (loss), as all options granted to employees under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. In December 2002, FASB issued Statement of Financial Accounting
6
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
September 26, 2004
(unaudited)
Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation Transition
and Disclosure" ("SFAS No. 148"). The statement amends SFAS No. 123, "Accounting
For Stock-Based Compensation," to provide alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. The Company adopted the disclosure provisions of SFAS No.
148 on January 1, 2003.
The following table sets forth the effect on net income (loss) and
earnings (loss) per share if the Company had applied the fair value recognition
provisions of SFAS No. 123 to stock-based employee compensation (in thousands,
except per share data):
Three Months Ended Nine Months Ended
------------------------------ -------------------------------
September 26, September 28, September 26, September 28,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Net income (loss):
As reported ............................................. $ 10,197 $ (3,903) $ 20,872 $ (29,440)
Add: Total stock-based employee compensation
expense included in net income (loss) ................... -- -- -- --
Deduct: total stock-based employee
compensation expense determined under fair
value based method for all awards ....................... (1,852) (685) (5,331) (1,843)
---------- ---------- ---------- ----------
As adjusted ............................................. $ 8,345 $ (4,588) $ 15,541 $ (31,283)
========== ========== ========== ==========
Net income (loss) per share - Basic:
As reported ............................................. $ 0.20 $ (0.09) $ 0.43 $ (0.66)
========== ========== ========== ==========
As adjusted ............................................. $ 0.17 $ (0.10) $ 0.32 $ (0.70)
========== ========== ========== ==========
Net income (loss) per share -- Diluted:
As reported ............................................. $ 0.20 $ (0.09) $ 0.41 $ (0.66)
========== ========== ========== ==========
As adjusted ............................................. $ 0.16 $ (0.10) $ 0.31 $ (0.70)
========== ========== ========== ==========
Note 2 -- Balance Sheet Detail (in thousands):
September 26, December 31,
2004 2003
------------- ------------
Inventories:
Purchased parts and raw materials ........................................ $32,349 $18,884
Work-in-process .......................................................... 14,001 5,444
Finished goods ........................................................... 5,338 3,102
------- -------
$51,688 $27,430
======= =======
Accrued liabilities:
Warranty ................................................................. $16,157 $16,508
Accrued compensation and benefits ........................................ 9,309 6,596
Income taxes ............................................................. 6,900 6,992
Other .................................................................... 23,141 32,512
------- -------
$55,507 $62,608
======= =======
Note 3 -- Disposition of Wet Business
On March 17, 2003, the Company sold the portion of its business that was
engaged in developing, manufacturing, selling, and servicing wet surface
preparation products for the cleaning and preparation of semiconductor wafers
(the "Wet Business") to SCP Global Technologies, Inc. ("SCP"). The Company had
originally acquired the Wet Business on January 1, 2001, as part of its merger
with the STEAG Semiconductor Division of STEAG Electronic Systems AG ("STEAG")
and CFM Technologies, Inc. ("CFM"). As part of this
7
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
September 26, 2004
(unaudited)
disposition, SCP acquired certain subsidiaries and assets, and assumed certain
contracts relating to the Wet Business, including the operating assets, customer
contracts and inventory of CFM, all outstanding stock of Mattson Technology IP,
Inc. ("Mattson IP"), a subsidiary that owns various patents relating to the Wet
Business, and all equity ownership interest in Mattson Wet Products GmbH, a
subsidiary in Germany that owned the Company's principal Wet Business
operations. The Company retained rights to all the cash from the Wet Business
entities, and the Company retained all rights to payments under the settlement
and license agreements with Dainippon Screen Manufacturing Co., Ltd. ("DNS").
SCP acquired the rights to any damages under pending patent litigation relating
to patents owned by Mattson IP. SCP assumed responsibility for the operations,
sales, marketing and technical support services for the Company's former wet
product lines worldwide.
The initial purchase price paid to the Company by SCP to acquire the Wet
Business was $2 million in cash. That initial purchase price was subject to
adjustment based on a number of criteria, including the net working capital of
the Wet Business at closing, to be determined post-closing based on a pro forma
closing date balance sheet, and an earn-out, up to an aggregate maximum of $5
million, payable to the Company based upon sales by SCP of certain products to
identified customers through December 31, 2004. There has been no earn-out
received to date through the period ended September 26, 2004.
Under the terms of the disposition, the Company remained responsible after
the closing for negotiating with the workers' council and funding a significant
reduction in force for the Wet Business operations in Germany; agreed to provide
transitional support of information services, spare parts logistics and certain
other functions in support of the Wet Business for an extended period; assumed
certain real property leases relating to transferred facilities in Germany,
subject to a sublease to SCP; agreed to reimburse specified legal fees to the
extent incurred by SCP in pursuit of existing Wet Business litigation; and
remained responsible for resolving or funding resolution of specified customer
responsibilities. The Company received the right to earn out payments, as
described above, and retained the right to payments under the DNS settlement. As
a result of the significant continuing involvement by the Company subsequent to
the disposition, the transaction was accounted for as a sale of assets and
liabilities.
On December 5, 2003, the Company signed a Second Amendment to Stock and
Asset Purchase Agreement for Wet Products Division (the "Second Amendment") with
SCP. Under the terms of the Second Amendment, the Company paid $4.4 million to
SCP in satisfaction of all further liabilities relating to (i) working capital
adjustments, (ii) pension obligations, (iii) reductions in force in Germany (iv)
reimbursement of legal fees, and (v) reimbursement of amounts necessary to cover
specified customer responsibilities.
In the first quarter of 2003, the Company recorded a $10.3 million loss on
the disposition of the Wet Business, as detailed below (in thousands):
Contractual purchase price payment from SCP ................ $ 2,000
Net book value of assets sold,
including goodwill and intangibles ....................... (80,824)
Net book value of liabilities assumed by SCP,
including deferred revenues .............................. 76,117
Other ...................................................... (7,550)(1)
--------
Loss on disposition of the Wet Business ............... $(10,257)
========
- ----------
(1) Included in the Other category were cumulative translation adjustments,
estimated future costs associated with reduction in force, working capital
adjustment, indemnification for future legal fees, investment banker's
fees, and legal, accounting and other professional fees directly
associated with the disposition of the Wet Business.
During the first quarter of 2003, as part of the loss on disposition of
the Wet Business, the Company recorded accruals of approximately $11.9 million
to cover the future obligations relating to this transaction. The Company has
not recorded any additional accruals relating to the transaction.
During 2003, the Company paid $11.5 million relating to reductions in
force, working capital adjustment, investment banker's fees, legal fees, and
accounting and other professional fees which were charged against accruals
8
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
September 26, 2004
(unaudited)
established at the closing of the sale. With the effectiveness of the Second
Amendment on December 5, 2003, the Company has no further obligation to SCP
relating to the sale of the Wet Business.
The Company's Wet Business represented a significant portion of the
Company's net sales and costs in 2001, 2002 and the first quarter of 2003. As a
result, the divestiture of the Wet Business affects the comparability of the
Company's Consolidated Statements of Operations and Balance Sheet for the first
nine months of 2004 to its reported results from those prior periods. For
periods prior to the divestiture of the Wet Business, the Company's net sales
were comprised primarily of sales of Wet Business products, sales of rapid
thermal processing ("RTP") products and strip products, and royalties received
from DNS. Following the divestiture of the Wet Business, the Company's net sales
are comprised primarily of sales of RTP and strip products, and royalties
received from DNS. In the fourth quarter of 2003, $1.3 million of revenue was
recognized that related to a deferred Wet system that remained the property of
the Company after the divestiture.
Note 4 -- Goodwill and Intangible Assets
The following table summarizes the components of goodwill, other
intangible asset and related accumulated amortization balances (in thousands):
September 26, 2004 December 31, 2003
--------------------------------- -----------------------------------
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
------ ------------ ------ ------ ------------ ------
Goodwill ........................................... $ 8,239 $ -- $ 8,239 $ 8,239 $ -- $ 8,239
Developed technology ............................... 6,565 (4,924) 1,641 6,565 (3,939) 2,626
------- ------- ------- ------- ------- -------
Total goodwill and intangible assets ............... $14,804 $(4,924) $ 9,880 $14,804 $(3,939) $10,865
======= ======= ======= ======= ======= =======
Amortization expense related to intangible assets was as follows (in
thousands):
Three Months Ended Nine Months Ended
----------------------------- ----------------------------
September 26, September 28, September 26, September 28,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Developed technology amortization................. $ 328 $ 328 $ 985 $ 1,823
-------- -------- -------- --------
Total amortization........................... $ 328 328 $ 985 $ 1,823
======== ======== ======== ========
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets,"
the Company performed an annual goodwill impairment test as of December 31, 2003
and determined that goodwill was not impaired. The Company evaluates goodwill at
least on an annual basis and whenever events and changes in circumstances
suggest that the carrying amount may not be recoverable from its estimated
future cash flow. No assurances can be given that future evaluations of goodwill
will not result in charges as a result of future impairment.
An intangible asset for workforce was reclassified to goodwill upon
adoption of SFAS No. 141, "Business Combinations," on January 1, 2002. The
Company continues to amortize developed technology intangible assets.
Amortization expense for developed technology and other intangible assets was
$0.3 million and $0.3 million for the three months ended September 26, 2004 and
September 28, 2003, respectively. Amortization expense for developed technology
and other intangible assets was $1.0 million and $1.8 million for the nine
months ended September 26, 2004 and September 28, 2003, respectively. The
amortization expense is estimated to be $1.3 million for each of years 2004 and
2005. In the first quarter of 2003, goodwill and intangible assets relating to
developed technology were reduced by $4.4 million and $10.5 million,
respectively, in connection with the Wet Business divestiture.
9
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
September 26, 2004
(unaudited)
Note 5 -- Net Income (Loss) Per Share
Earnings per share is calculated in accordance with SFAS No. 128,
"Earnings Per Share." SFAS No. 128 requires dual presentation of basic and
diluted net income (loss) per share on the face of the income statement. Basic
earnings per share ("EPS") is computed by dividing income (loss) available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted EPS gives effect to all dilutive potential common shares
outstanding during the period. For purposes of computing diluted earnings per
share, weighted average common share equivalents do not include stock options
with an exercise price that exceeded the average market price of the Company's
common stock for the period. All amounts in the following table are in thousands
except per share data:
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
September 26, September 28, September 26, September 28,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Net income (loss) .................................................... $ 10,197 $ (3,903) $ 20,872 $(29,440)
======== ======== ======== ========
Basic income (loss) per share:
Income (loss) available to common stockholders ................. $ 10,197 $ (3,903) $ 20,872 $(29,440)
Weighted average common shares outstanding ..................... 49,922 44,975 49,085 44,911
-------- -------- -------- --------
Basic earnings (loss) per share .............................. $ 0.20 $ (0.09) $ 0.43 $ (0.66)
======== ======== ======== ========
Diluted income:
Income (loss) available to common stockholders ................. $ 10,197 $ (3,903) $ 20,872 $(29,440)
-------- -------- -------- --------
Weighted average common shares outstanding ..................... 49,922 44,975 49,085 44,911
Diluted potential common shares from stock options ............. 1,129 -- 1,503 --
-------- -------- -------- --------
Weighted average common shares and diluted
potential common shares ...................................... 51,051 44,975 50,588 44,911
-------- -------- -------- --------
Diluted income (loss) per share .............................. $ 0.20 $ (0.09) $ 0.41 $ (0.66)
======== ======== ======== ========
For the three and nine months ended September 26, 2004, 3,238,665 and
2,607,082 shares of common stock, respectively, subject to outstanding options
were not included in the calculation of diluted net income per share because
they were considered antidilutive (i.e., the per share exercise price for such
options exceeded the trading price of the Company's common stock as reported on
The Nasdaq Stock Market). Total stock options outstanding at September 28, 2003
of 4,638,889 were excluded from the computation of diluted EPS because the
effect of including them would have been antidilutive.
Note 6 -- Comprehensive Income (Loss)
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
disclosure and financial statement presentation for reporting total
comprehensive income and its individual components. Comprehensive income, as
defined, includes all changes in equity during a period from non-owner sources.
The following are the components of comprehensive income (loss) (in
thousands):
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
September 26, September 28, September 26, September 28,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Net income (loss) .......................................... $ 10,197 $ (3,903) $ 20,872 $(29,440)
Cumulative translation adjustments ......................... 1,173 (1,150) (276) (850)
Unrealized investment gain (loss) .......................... (9) -- -- 87
Gain (loss) on cash flow hedging instruments ............... -- 7 -- (202)
-------- -------- -------- --------
Comprehensive gain (loss) ............................ $ 11,361 $ (5,046) $ 20,596 $(30,405)
======== ======== ======== ========
10
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
September 26, 2004
(unaudited)
The components of accumulated other comprehensive income, net of related
tax, are as follows (in thousands):
September 26, December 31,
2004 2003
------------- ------------
Cumulative translation adjustments .............. $ 9,192 $ 9,469
Unrealized investment loss ...................... -- (1)
------- -------
$ 9,192 $ 9,468
======= =======
Note 7 -- Reportable Segments
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for reporting information about operating
segments in financial statements. Operating segments are defined as components
of an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker, or chief decision
making group, in deciding how to allocate resources and in assessing
performance. The chief executive officer of the Company is the Company's chief
decision maker. As the Company's business is completely focused on one industry
segment - design, manufacturing and marketing of advanced fabrication equipment
to the semiconductor manufacturing industry - management believes that the
Company has one reportable segment. The Company's revenues and profits are
generated through the sale and service of products for this one segment. As a
result, no additional operating segment information is required to be disclosed.
The following is net sales information by geographic area for the periods
presented (dollars in thousands):
Three Months Ended Nine Months Ended
------------------------------------------ ----------------------------------------
September 26, 2004 September 28, 2003 September 26, 2004 September 28, 2003
-------------------- -------------------- ------------------- ------------------
($) (%) ($) (%) ($) (%) ($) (%)
---------- ----- -------- ----- --------- ----- --------- -----
Taiwan..................... $ 29,799 44 $ 5,699 17 $ 73,021 40 $ 30,081 23
Japan...................... 11,604 17 10,675 33 32,754 18 24,120 18
United States.............. 8,618 13 3,832 12 20,866 11 20,358 16
China...................... 6,611 10 3,666 11 19,321 11 13,598 11
Korea...................... 2,231 3 4,571 14 13,595 8 17,428 13
Germany ................... 5,070 7 1,641 5 13,023 7 17,401 13
Europe - others............ 3,218 5 1,899 6 5,263 3 2,435 2
Singapore.................. 887 1 650 2 3,471 2 5,505 4
-------- -------- --------- ---------
$ 68,038 $ 32,633 $ 181,314 $ 130,926
======== ======== ========= =========
The net sales above have been allocated to the geographic areas based upon
the installation location of the systems.
In the third quarter of 2004, two customers accounted for 12% and 11%,
respectively of net sales. In the third quarter of 2003, three customers
accounted for 10%, 13% and 15% of net sales. During the first nine months of
2004, two customers each accounted for 12% of net sales. During the first nine
months of 2003, two customers accounted for 21% and 13% of net sales.
At September 26, 2004, two customers each accounted for 10% or more of the
Company's accounts receivables, net, accounting for 15% and 12%, respectively.
At December 31, 2003, two customers each accounted for more than 10% of the
Company's accounts receivables, accounting for approximately 14% and 19%,
respectively.
11
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
September 26, 2004
(unaudited)
Note 8 -- Debt
The Company's Japanese subsidiary has a credit facility with a Japanese
bank in the amount of 900 million Yen (approximately $8.3 million at September
26, 2004), collateralized by specific trade accounts receivable of the Japanese
subsidiary. At September 26, 2004, ther were no borrowings outstanding under
this credit facility. The facility bears interest at a per annum rate of TIBOR
plus 75 basis points (0.80% at September 26, 2004). The facility expires on June
20, 2005. The Company has given a corporate guarantee for this credit facility.
There are no financial covenant requirements for this credit facility.
The Company has a revolving line of credit with a U.S. bank in the amount
of $20.0 million, which expires on April 26, 2005. All borrowings under this
credit line bear interest at a per annum rate equal to the bank's prime rate
plus 125 basis points (6% at September 26, 2004). The line of credit is
collateralized by a blanket lien on all of the Company's domestic assets
including intellectual property. The line of credit requires the Company to
satisfy certain quarterly financial covenants, including maintaining a minimum
balance of unrestricted cash and cash equivalents and a minimum balance of
investment accounts, and not exceeding a maximum net loss limit. At September
26, 2004, the Company was in compliance with the covenants and there were no
borrowings under this credit line.
Note 9 -- Employee Stock Option and Stock Purchase Plans
Employee Stock Option Grants
Options to purchase 42,668 and 942,608 shares of common stock were granted
to employees during the three and nine months ended September 26, 2004. As of
September 26, 2004, options to purchase 6,038,317 shares of common stock were
outstanding.
Employee Stock Purchase Plan
As of September 26, 2004, 2,376,662 shares had been issued under the
Employee Stock Purchase Plan (the "Purchase Plan") since its inception in August
1994.
Fair Value Disclosures
Information regarding net income and net income per share, as adjusted, is
required by SFAS No. 123, which also requires that the information be determined
as if the Company had accounted for its employee stock options granted under the
fair value method. The fair value for these options was estimated using the
Black-Scholes option pricing model employing the multiple option valuation
methodology. The per share weighted average estimated fair value for employee
options granted was $9.10 and $4.52 during the three months ended September 26,
2004 and September 28, 2003, respectively. The per share weighted average
estimated fair value for employee options granted was $11.01 and $2.73 during
the nine months ended September 26, 2004 and September 28, 2003, respectively.
The Black-Scholes model was developed for use in estimating the fair value of
traded options that have no restrictions and are fully transferable and
negotiable in a freely traded market. Black-Scholes does not consider the
employment, transfer or vesting restrictions that are inherent in the Company's
employee options. The usage of an option valuation model, as required by SFAS
No. 123, includes highly subjective assumptions based on long-term predictions,
including the expected stock price volatility and average life of each option
grant. Because the Company's employee options have characteristics significantly
different from those of freely traded options, and because changes in the
subjective input assumptions can materially affect the Company's estimate of the
fair value of those options, it is the Company's opinion that the existing
valuation models, including Black-Scholes, are not reliable single measures and
may misstate the fair value of the Company's employee options.
12
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
September 26, 2004
(unaudited)
The following weighted average assumptions are included in the estimated
fair value calculations for stock option grants in the three and nine months
ended September 26, 2004 and September 28, 2003:
Employee Stock Option Plans
--------------------------------------------------------------------
Three Months Ended Nine Months Ended
-------------------------------- --------------------------------
September 26, September 28, September 26, September 28,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Risk-free interest rate ................................ 2.32% 3.00% 1.96% 3.00%
Expected term of options (in years) .................... 1.5 1.5 1.5 1.5
Expected volatility .................................... 99.5% 98.6% 99.5% 98.6%
Expected dividend yield ................................ 0 0 0 0
Using Black-Scholes, the per share weighted average estimated fair value
of rights issued pursuant to the Company's Purchase Plan during the three and
nine months ended September 26, 2004 and September 28, 2003 was $7.56 and $3.06,
respectively.
The following weighted average assumptions are included in the estimated
grant date fair value calculations for rights to purchase stock under the
Purchase Plan:
Employee Stock Purchase Plan
--------------------------------------------------------------------
Three Months Ended Nine Months Ended
-------------------------------- --------------------------------
September 26, September 28, September 26, September 28,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Risk-free interest rate ................................ 2.0% 1.2% 1.7% 1.2%
Expected term of options (in years) .................... 0.5 0.5 0.5 0.5
Expected volatility .................................... 52.3% 67.6% 58.1% 91.8%
Expected dividend yield ................................ 0 0 0 0
Note 9 -- Related Party Transactions
On February 17, 2004, STEAG sold approximately 4.3 million shares of the
Company's common stock in an underwritten public offering at $11.50 per share.
Following that sale, STEAG continued to hold approximately 8.9 million shares,
or 17.7%, of the 50.0 million outstanding shares of the Company's common stock.
Note 10 -- DNS Patent Infringement Suit Settlement
On March 5, 2002, a jury in San Jose, California rendered a verdict in
favor of the Company's then subsidiary, Mattson Wet Products, Inc. (formally CFM
Technologies, Inc.), in a patent infringement suit against Dainippon Screen
Manufacturing Co., Ltd. ("DNS"), a large Japanese manufacturer of semiconductor
wafer processing equipment. The jury found that six different DNS wet processing
systems infringed on two of CFM's drying technology patents and that both
patents were valid. On June 24, 2002, the Company and DNS jointly announced that
they had amicably resolved their legal disputes with a comprehensive, global
settlement agreement, which included termination of all outstanding litigation
between the companies. On March 17, 2003, as part of the disposition of the Wet
Business, the Company sold to SCP the subsidiary that owns the patents licensed
to DNS. However, the Company retained all rights to payments under the
settlement and license agreements. The settlement agreement and license
agreement require DNS to make payments to Mattson totaling between a minimum of
$75 million and a maximum of $105 million, relating to past damages, partial
reimbursement of attorney's fee and costs, and royalties.
13
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
September 26, 2004
(unaudited)
As of September 26, 2004, DNS had made payments aggregating $57.0 million
under the settlement and license agreements. Of the $57.0 million paid by DNS as
of September 26, 2004, $4.6 million was withheld to pay Japanese withholding
tax, and the net amount the Company received was $52.4 million. In the third
quarter of 2004, the Company received confirmation that its request for
"competent authority" with the IRS has been granted in connection with its
attempt to obtain a partial refund of Japanese taxes withheld in connection with
its DNS effort. The Company expects that it will receive an approximately $2.9
million refund of withheld taxes in the fourth quarter of 2004. In future
periods, the Company is scheduled to receive minimum royalty payments as follows
(in millions):
Future
DNS Minimum
Payments
Fiscal Period to be Received
------------- --------------
April 2005 $ 6.0
April 2006 6.0
April 2007 6.0
-------
$ 18.0
=======
During July 2004, DNS made an additional royalty payment of approximately
$370,000, beyond the minimum royalty payment of $6.0 million made in April 2004,
based on their actual sales. This payment brought the total amount paid by DNS
to $57.4 million.
The Company determined, based on relative fair values, how much of the
aggregate payments due to the Company are attributable to past disputes and how
much are attributable to future royalties on DNS sales of the wet processing
products. The Company allocated $15.0 million to past damages, which was
recorded as "other income" during 2002, and allocated $60 million to royalty
income, which is being recognized in net sales in the income statement on a
straight-line basis over the license term. During the three and nine months
ended September 26, 2004, the Company recognized royalty income of $3.2 million
and $9.6 million, respectively.
Note 11 -- Guarantees
The Company adopted Financial Accounting Standards Board Interpretation
No. 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees,
including Indirect Indebtedness of Others" ("FIN 45") during the fourth quarter
of 2002. FIN 45 requires disclosures concerning the Company's obligation under
certain guarantees, including its warranty obligations.
Under its warranty obligations, the Company is required to repair or
replace defective products or parts, generally at a customer's site, during the
warranty period at no cost to the customer. The warranty offered on the
Company's systems ranges from 12 months to 36 months depending on the product. A
provision for the estimated cost of warranty is recorded as a cost of sales,
based on the historical costs, at the time of revenue recognition. The actual
system performance and/or field expense profiles may differ from historical
experience, and in those cases the Company adjusts its warranty accruals
accordingly. The following table is the detail of the product warranty accrual
for the three and nine months periods ended September 26, 2004 and September 28,
2003 (in thousands):
Three Months Ended Nine Months Ended
----------------------------- --------------------------------
September 26, September 28, September 26, September 28,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Balance at beginning of period ............................. $ 16,773 $ 17,437 $ 16,508 $ 16,486
Accrual for warranties during the period ................... 3,309 1,567 10,882 5,721
Changes in liability related to pre-existing
warranties ............................................ -- (1,079) -- (1,079)
Settlements made during the period ......................... (3,925) (918) (11,233) (4,121)
-------- -------- -------- --------
Balance at end of period .............................. $ 16,157 $ 17,007 $ 16,157 $ 17,007
======== ======== ======== ========
14
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
September 26, 2004
(unaudited)
During the ordinary course of business, the Company provides standby
letters of credit or other guarantee instruments to certain parties as
necessary. As of September 26, 2004, the maximum potential amount of future
payments that the Company could be required to make under these standby letters
of credit is approximately $1.1 million, representing collateral for corporate
credit cards, certain equipment leases and security deposits. The Company has
not recorded any liability in connection with these guarantee arrangements
beyond that required to appropriately account for the underlying transaction
being guaranteed. The Company does not believe, based on historical experience
and information currently available, that it is probable that any amounts will
be required to be paid under these guarantee arrangements.
The Company is a party to a variety of agreements pursuant to which it may
be obligated to indemnify the other party with respect to certain matters.
Typically, these obligations arise in the context of contracts entered into by
the Company, under which the Company may agree to hold the other party harmless
against losses arising from a breach of representations or under which the
Company may have an indemnity obligation to the counterparty with respect to
certain intellectual property matters or certain tax related matters.
Customarily, payment by the Company with respect to such matters is conditioned
on the other party making a claim pursuant to the procedures specified in the
particular contract, which procedures typically allow the Company to challenge
the other party's claims. Further, the Company's obligations under these
agreements may be limited in terms of time and/or amount, and in some instances
the Company may have recourse against third parties for certain payments made by
the Company. It is not possible to predict the maximum potential amount of
future payments under these or similar agreements due to the conditional nature
of the Company's obligations and the unique facts and circumstances involved in
each particular agreement. Historically, payments made by the Company under
these agreements have not had a material effect on the Company's financial
position or results of operations. The Company believes if it were to incur a
loss in any of these matters, such loss should not have a material effect on the
Company's financial position or results of operations.
Note 12 -- Restructuring and Other Charges
During the third quarter of 2003, the Company recorded restructuring and
other charges of $489,000 that included $381,000 for workforce reduction and
$108,000 for consolidation of excess facilities. The following is a summary of
activities in the restructuring-related accruals during the nine month period
ended September 26, 2004 (in thousands):
Liability as of Cash Payments Liability as of
December 31, Nine Months Ended September 26,
2003 September 26, 2004 2004
------------ ----------------- -------------
Workforce reduction ................................................ $ 115 $ (35) $ 80
Consolidation of excess facilities ................................. 1,175 (141) 1,034
------ ------ ------
Total ........................................................ $1,290 $ (176) $1,114
====== ====== ======
Note 13 -- Public Offering
On December 23, 2003, the Company filed a shelf registration statement on
Form S-3 that would allow the Company to sell, from time to time, up to $100
million of its common stock or other securities. The shelf registration
statement also covered sales of up to 5.9 million of the already outstanding
shares of Company common stock owned by STEAG. The registration statement was
declared effective by the Securities and Exchange Commission ("SEC") on January
9, 2004.
On February 17, 2004, the Company sold approximately 4.3 million newly
issued shares of common stock, and STEAG sold approximately 4.3 million already
outstanding shares of Company common stock, in an underwritten public offering
priced at $11.50 per share. This resulted in proceeds to the Company, net of
underwriting discounts and transaction expenses, through the third quarter of
2004, of approximately $46.4 million. Out of the gross proceeds from the sale of
common stock by the Company of approximately $49.6 million, approximately $2.5
million represented underwriting discounts and commissions, and there were other
costs and expenses of approximately $0.6 million, primarily for legal,
accounting and printing services, through the third
15
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
September 26, 2004
(unaudited)
quarter of 2004. The Company estimates its net proceeds were approximately $46.3
million, net payment of transaction costs.
The Company intends to use the net proceeds received from the offering for
general corporate purposes, including working capital requirements and potential
strategic acquisitions or investments. The Company did not receive any proceeds
from the sale of shares by STEAG. STEAG remained the Company's single largest
shareholder, holding approximately 8.9 million, or 17.7%, of the approximately
50.0 million outstanding shares of Company common stock immediately following
the offering.
Note 14 -- Commitments and Contingencies
The Company is party to certain claims arising in the ordinary course of
business. While the outcome of these matters is not presently determinable,
management believes that they will not have a material adverse effect on the
financial position or results of operations of the Company.
The Company leases two buildings previously used to house its
manufacturing and administrative functions related to wet surface preparation
products in Exton, Pennsylvania. The lease for both buildings has approximately
15 years remaining with a combined rental cost of approximately $1.5 million
annually. The lease agreement for both buildings allows for subleasing the
premises without the approval of the landlord. In June 2002, the administrative
building was sublet for a period of approximately five years, until December
2007, with an option for the subtenant to extend for an additional five years.
The sublease, under which lease payments aggregate to approximately $7.2
million, is expected to cover all related costs on the administrative building
during the sublease period. In July 2003, the manufacturing building at the
Exton, Pennsylvania location was sublet for a period of approximately three
years, until September 2006, with an option for the subtenant to renew for a
total of two successive periods, the first for five years and the second for the
balance of the term of the master lease. The sublease, under which lease
payments aggregate approximately $2.1 million, is expected to cover all related
costs on the manufacturing building during the sublease period. In determining
the facilities lease loss, net of cost recovery efforts from expected sublease
income, various assumptions were made, including, the time periods over which
the buildings will be vacant; expected sublease terms; and expected sublease
rates. The Company has estimated that under certain circumstances the facilities
lease losses could be approximately $0.8 million for each additional year that
the facilities are not leased and could aggregate to approximately $12.6
million, net of expected sublease income, under certain circumstances. The
Company expects to make payments related to the above noted facilities lease
losses over the next fifteen years, less any amounts received under subleases.
Adjustments for the facilities leases and subleases will be made in future
periods, if necessary, based upon the then current actual events and
circumstances.
In connection with the disposition of the Wet Business, the Company
assumed the lease obligations with respect to the facilities used to house the
manufacturing and administrative functions of the transferred Wet Business in
Pliezhausen, Germany. That lease has approximately two years remaining, ending
in August 2006, with an approximate rental cost of $1.2 million annually. The
Company had sublet the facilities to SCP on terms that covered all rent and
costs payable by the Company under the primary lease. During the third quarter
of 2004 and the first nine months of 2004, the Company received sublease
payments of approximately $0.3 million and $0.9 million, respectively, from SCP.
Under its sublease, SCP has the right upon 90 days notice to partially or
completely terminate the sublease. In the second quarter of 2004, SCP terminated
the sublease completely. The Company is responsible for the future lease costs
of approximately $2.5 million through August 2006, net of cost recovery efforts
and any sublease income. The Company has fully accrued for the costs related to
this lease, as part of restructuring.
In the ordinary course of business, the Company is subject to claims and
litigation, including claims that it infringes third party patents, trademarks
and other intellectual property rights. Although the Company believes that it is
unlikely that any current claims or actions will have a material adverse impact
on its operating results or its financial position, given the uncertainty of
litigation, the Company cannot be certain of this. Moreover, the defense of
claims or actions against the Company, even if not meritorious, could result in
the expenditure of significant financial and managerial resources.
16
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
September 26, 2004
(unaudited)
The Company is currently party to legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business. While
the outcome of these matters is not presently determinable and cannot be
predicted with certainty, management does not believe that the outcome of any of
these matters or any of the above mentioned legal claims will have a material
adverse effect on the Company's financial position, results of operations or
cash flow.
Note 15 -- Income Taxes
In the third quarter of 2004, the Company recorded income tax expense of
approximately $1,000, which consisted of foreign taxes incurred by its foreign
sales and service operations of approximately $24,000, foreign withholding taxes
on royalty income of $72,000, and federal and state income taxes of
approximately $30,000, partially offset by a deferred tax benefit on the
amortization of certain intangible assets of $0.1 million. The effective income
tax rate was zero percent for the third quarter of 2004. In the first nine
months of 2004, the Company recorded income tax expense of approximately $0.3
million, which consisted of foreign taxes of approximately $0.6 million, and
federal and state income taxes of approximately $0.1 million, partially offset
by a deferred tax benefit on the amortization of certain intangible assets of
$0.4 million. The effective income tax rate was 1.5% for the nine months ended
September 26, 2004. At September 26, 2004, the Company has provided a full
valuation allowance against its net deferred tax asset as management believes
that sufficient uncertainty exists with regard to the realizability of tax
assets. Factors considered in providing a valuation allowance include the lack
of a significant history of consistent profits and the lack of carryback
capacity to realize these assets. Based on the absence of objective evidence,
management is unable to assert that it is more likely than not that the Company
will generate sufficient taxable income to realize all the Company's net
deferred tax assets.
In the third quarter of 2003, the Company recorded an income tax benefit
of approximately $21,000, and an income tax provision of approximately $0.1
million for the first nine months of 2003, which consisted of foreign
withholding taxes of $0.6 million, foreign taxes incurred by our foreign sales
and service operations of $0.1 million, and state income taxes of approximately
$0.1 million, partially offset by a deferred tax benefit on the amortization of
certain intangible assets of $0.7 million. There was no US or German current
income tax benefit or expense. The effective income tax rate was a negative 0.6%
for the nine months ended September 28, 2003. At September 28, 2003, the Company
provided a full valuation allowance against its net deferred tax asset as
management believes that sufficient uncertainty exists with regard to the
realizability of tax assets.
Note 16 -- Subsequent Event
On October 27, 2004, the Company acquired certain outstanding debt and
equity ownership interests in Vortek Industries Ltd., a privately held
corporation amalgamated under the laws of British Columbia ("Vortek") for a
purchase price of approximately $17.0 million. As a result of the transaction,
Vortek became a wholly-owned subsidiary of the Company. Vortek is a developer of
millisecond flash annealing technology for rapid thermal processing of silicon
wafers, for use in the manufacture of semiconductors. Vortek is based in
Vancouver, Canada.
As consideration for the acquisition of Vortek, Mattson issued an
aggregate of 1,452,808 shares of its common stock, which represents
approximately 2.8% of the outstanding common shares of the Company. Between June
28, 2004 and October 27, 2004, the Company provided approximately $2.5 million
in working capital loans to Vortek. Of the shares of common stock issued by the
Company in the Vortek transaction, 290,561 (the "Escrow Shares") are being held
subject to an escrow agreement. The Escrow Shares are subject to forfeiture in
the event of valid indemnification claims by the Company within a period of 12
months from October 27, 2004.
In connection with the Vortek acquisition, the Company entered into a
Stock Registration and Restriction Agreement, dated as of October 27, 2004,
pursuant to which the Company agreed to register the shares issued in the
17
MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
September 26, 2004
(unaudited)
Vortek acquisition, other than the Escrow Shares, under the Securities Act of
1933, for resale by the recipients, and the recipients agreed to certain
restrictions on the transfer of such shares.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our unaudited condensed
consolidated financial statements and related notes included elsewhere in this
report, and in conjunction with our audited consolidated financial statements
and related notes and other financial information included in our Annual Report
on Form 10-K. In addition to historical information, this discussion contains
certain forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from those anticipated by these
forward-looking statements due to factors including, but not limited to, those
set forth or incorporated by reference under "Factors That May Affect Future
Results and Market Price of Stock" and elsewhere in this document.
Overview
We are a leading supplier of semiconductor wafer processing equipment used
in the fabrication of integrated circuits. Our products include dry strip, rapid
thermal processing, or RTP, and plasma enhanced chemical vapor deposition, or
PECVD, equipment. Our manufacturing equipment utilizes innovative technology to
deliver advanced processing capability and high productivity to semiconductor
manufacturers for both 200 mm and 300 mm wafer production at technology nodes at
and below 130 nanometers, or nm.
The last three years, 2001 to 2003, were a period of great challenge and
significant change for us. The external market environment was extremely
difficult, with the semiconductor industry experiencing a significant downturn,
resulting in severe capital spending cutbacks by our customers. At the beginning
of 2001, we had just completed the simultaneous acquisition of the semiconductor
equipment division of STEAG Electronic Systems AG, or STEAG, and CFM
Technologies, Inc. This more than doubled the size of our company and changed
the nature and breadth of our product lines. On top of the many challenges in
integrating multiple merged companies, we were faced with the impact of
dramatically lower sales as a result of the downturn in the industry that
resulted in excess production capacity. We determined to refocus our business on
our core technologies in dry strip and rapid thermal processing, and in 2002 and
the first quarter of 2003 we took restructuring actions to align our business
with this focus and to reduce our cost structure. As part of this restructuring
effort, we divested a significant line of business, our wet surface preparation
products, or the Wet Business, in March of 2003.
Our organization and structure was very different at the end of 2003 than
it was at the beginning of 2003 or during 2001 and 2002. Because of our
significant restructurings and divestitures during this period, both our revenue
sources and our cost structure have significantly changed. This affects the
comparability of our more recently reported financial information, and causes
our historical information not to be a good indicator or predictor of results
for future periods. Our size, structure and product focus have been more stable
during the last three quarters of 2003 and the first three quarters of 2004.
We recorded losses from operations in each of the years 2001, 2002 and
2003. However, as a result of our restructurings and divestitures, we reduced
our cost structure and reduced our rate of losses throughout that period.
As we finished 2003, we achieved a profit of $1.1 million from operations
for the fourth quarter. For the first, second and third quarters of 2004, we
recorded net income of $3.3 million, $7.4 million and $10.2 million,
respectively.
Our net income was $10.2 million in the third quarter of 2004, compared to
a loss of $3.9 million in the third quarter of 2003, on a $35.4 million increase
in net sales. This reflected the improvement in the efficiency and flexibility
of our manufacturing cost structure, which utilizes both internal and outsourced
manufacturing and allows us to increase production without increasing internal
headcount. We ended the third quarter of 2004 with approximately $80.5 million
in cash and cash equivalents. We have no long-term debt. With the recent
improvements in our operating results and the infusion of cash on our balance
sheet from a stock offering early in the year, we believe we are in a healthy
position in terms of liquidity and capital resources.
Our business depends upon capital expenditures by manufacturers of
semiconductor devices. The level of capital expenditures by these manufacturers
depends upon the current and anticipated market demand for such devices. Market
conditions improved significantly in the first part of 2004, but recently are
demonstrating signs of weakening in the current quarter. However, the
cyclicality and uncertainties regarding overall market conditions continue to
present significant challenges to us and limit our ability to forecast near term
revenue. Given that many of our costs are fixed in the short-term, our ability
to quickly modify our operations in response to changes in market
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
conditions is limited. Although we have implemented cost reduction and
operational flexibility measures, we are largely dependent upon increases in
sales in order to improve our profitability.
The success of our business in the future will be dependent on numerous
factors, including but not limited to the market demand for semiconductors and
semiconductor wafer processing equipment, and our ability to (1) develop and
bring to market new products that address our customers' needs, (2) grow
customer loyalty through collaboration with and support of our customers, and
(3) manage a cost structure which will enable us to operate effectively and
profitably throughout changing industry cycles.
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America, or United States or U.S. The preparation of these
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period. Our
management evaluates its estimates and judgments on an on-going basis, including
those related to reserves for excess and obsolete inventory, warranty
obligations, bad debts, intangible assets, income taxes, restructuring costs,
contingencies and litigation. Our management bases its estimates and judgments
on historical experience and on various other factors that are believed to be
reasonable under the circumstances. These form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.
We consider certain accounting policies related to revenue recognition,
warranty obligations, inventories, goodwill and other intangible assets,
impairment of long-lived assets, and income taxes as critical to our business
operations and an understanding of our results of operations.
Revenue recognition. We recognize revenue in accordance with the
Securities and Exchange Commission, or SEC, Staff Accounting Bulletin No. 104,
"Revenue Recognition," or SAB 104.
We derive revenue from two primary sources -- equipment sales and spare
part sales. We account for equipment sales as follows: (1) for all sales of new
products and sales of (and, for the first quarter of 2003 and earlier periods,
for all sales of our wet surface preparation products), revenue is recognized
upon customer acceptance; (2) for all sales of existing products, we recognize
revenue on a multiple element approach in which we divide a sale transaction
into two separate elements based on objective evidence of fair value. The two
elements are the tool and installation of the tool. Under this approach, the
portion of the invoice price that is due after installation services have been
performed and upon final customer acceptance of the tool has been obtained,
generally 10% of the total invoice price, is deferred until final customer
acceptance of the tool. The remaining portion of the total invoice price
relating to the tool, generally 90% of the total invoice price, is recognized
upon shipment and title transfer of the tool. From time to time, however, we
allow customers to evaluate systems, and since customers can return such systems
at any time with limited or no penalty, we do not recognize revenue until the
customer accepts these evaluation systems. Revenues associated with sales to
customers in Japan are recognized upon title transfer, which generally occurs
upon customer acceptance, with the exception of sales of our RTP products
through our distributor in Japan, where revenues are recognized upon title
transfer to the distributor, FOB shipping point. For spare parts, revenue is
recognized upon shipment. Service and maintenance contract revenue is recognized
on a straight-line basis over the service period of the related contract.
Revenues are difficult to predict, due in part to our reliance on customer
acceptance related to a portion of our revenues. Any shortfall in revenue or
delay in recognizing revenue could cause our operating results to vary
significantly from quarter to quarter and could result in future operating
losses.
Warranty. Our warranties require us to repair or replace defective
products or parts, generally at a customer's site, during the warranty period at
no cost to the customer. The warranty offered on our systems ranges from 12
months to 36 months, depending on the product. At the time we first recognize
revenue for a system sale, we record
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
a provision for the estimated cost of warranty as a cost of sales based on our
historical costs. While our warranty costs have historically been within our
expectations and the provisions we have established, we cannot be certain that
we will continue to experience the same warranty repair costs that we have in
the past. An increase in the costs to repair our products could have a material
adverse impact on our operating results for the period or periods in which such
additional costs materialize.
Inventories. We state inventories at the lower of cost or market, with
cost determined on a first-in, first-out basis. Due to changing market
conditions, estimated future requirements, age of the inventories on hand and
our introduction of new products, we regularly monitor inventory quantities on
hand and identify obsolete inventories that are no longer used in current
production. Accordingly, we write down our inventories to estimated net
realizable value. Actual demand may differ from forecasted demand and such
difference may result in write-downs that have a material effect on our
financial position and results of operations. In the future, if our inventory is
determined to be overvalued, we would be required to recognize the decline in
value in our cost of goods sold at the time of such determination. Although we
attempt to accurately forecast future product demand, given the competitive
pressures and cyclicality of the semiconductor industry there may be significant
unanticipated changes in demand or technological developments that could have a
significant impact on the value of our inventory and our reported operating
results.
Goodwill and Other Intangible Assets. We assess the realizability of
goodwill and other intangible assets at a minimum annually or whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable, in accordance with the provisions of SFAS No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 142 also requires that intangible assets with
estimable useful lives be amortized over their respective estimated useful lives
to their estimated residual values and reviewed for impairment in accordance
with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." Our judgments regarding the existence of impairment indicators are
based on changes in strategy, market conditions and operational performance of
our business. Future events, including significant negative industry or economic
trends, could cause us to conclude that impairment indicators exist and that
goodwill or other intangible assets are impaired. Any resulting impairment loss
could have a material adverse impact on our results of operations. In assessing
the recoverability of goodwill and other intangible assets, we must make
assumptions regarding estimated future cash flows and other factors to determine
the fair value of the respective assets. If these estimates or their related
assumptions change in the future, we may be required to record impairment
charges for these assets.
Impairment of Long-Lived Assets. We assess the impairment of identified
intangibles, long-lived assets and related goodwill whenever events or changes
in circumstances indicate that the carrying value may not be recoverable, in
accordance with the provisions of SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets." Our judgments regarding the existence of
impairment indicators are based on changes in strategy, market conditions and
operational performance of our business. Future events, including significant
negative industry or economic trends, could cause us to conclude that impairment
indicators exist and that long-lived assets are impaired. Any resulting
impairment loss could have a material adverse impact on our results of
operations. In assessing the recoverability of long-lived assets, we must make
assumptions regarding estimated future cash flows and other factors, including
discount rates and probability of cash flow scenarios, to determine the fair
value of the respective assets. If these estimates or their related assumptions
change in the future, we may be required to record impairment charges for these
assets.
Income taxes. We record a valuation allowance to reduce our net deferred
tax asset to the amount we estimate is more likely than not to be realized. In
assessing the need for a valuation allowance, we consider historical levels of
income, expectations and risks associated with estimates of future taxable
income and ongoing prudent and feasible tax planning strategies. In the event we
determine that we would be able to realize deferred tax assets in the future in
excess of the net recorded amount, we would record an adjustment to the deferred
tax asset valuation allowance. This adjustment would increase income in the
period such determination was made.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
Results of Operations
The following table sets forth our statement of operations data expressed
as a percentage of net sales for the periods indicated:
Three Months Ended Nine Months Ended
---------------------------- -----------------------------
September 26, September 28, September 26, September 28,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Net sales ........................................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales ....................................................... 54.8 60.9 56.3 66.8
----- ----- ----- -----
Gross profit .................................................. 45.2 39.1 43.7 33.2
----- ----- ----- -----
Operating expenses:
Research, development and engineering ......................... 8.3 13.7 8.8 14.3
Selling, general and administrative ........................... 22.0 38.7 22.8 32.3
Amortization of intangibles ................................... 0.4 1.0 0.5 1.4
Restructuring and other charges ............................... -- 1.6 -- 0.4
----- ----- ----- -----
Total operating expenses .................................... 30.7 55.0 32.1 48.4
----- ----- ----- -----
Income (loss) from operations ....................................... 14.5 (15.9) 11.6 (15.2)
Loss on disposition of Wet Business ................................. -- -- -- (7.8)
Interest and other income:
----- ----- ----- -----
Interest income ............................................... 0.5 1.0 0.5 0.7
----- ----- ----- -----
Interest expense .............................................. -- -- -- (0.1)
Other income (expense), net ................................... -- 2.9 (0.4) --
----- ----- ----- -----
Interest and other income, net .............................. 0.5 3.9 0.1 0.6
----- ----- ----- -----
Income (loss) before provision for (benefit from)
income taxes .................................................. 15.0 (12.0) 11.7 (22.4)
Provision for (benefit from) income taxes ........................... -- -- 0.2 0.1
----- ----- ----- -----
Net income (loss) ................................................... 15.0% (12.0)% 11.5% (22.5)%
===== ===== ===== =====
The divestiture of our Wet Business on March 17, 2003 has significantly
affected the comparability of our net sales and our costs in the nine-month
period ended September 26, 2004 to our reported results a year ago for the same
period and to periods prior to that. Our reported results for the first nine
months of 2003 include sales of Wet Business products and related costs, while
our results for the first nine months of 2004 do not. The following table
summarizes the amount of our net sales in each quarter of 2003 and in the first
three quarters of 2004 attributable to products of the Wet Business, to RTP and
strip products, and to royalties from DNS. We believe this additional
information regarding our prior period sales will facilitate comparison of our
current and future results of operations to our results from prior periods
(dollars in millions):
Net Sales Percent of Total Net Sales
-------------------------------------------------- ----------------------------------
Wet RTP and DNS Reported Wet RTP and DNS
Three Months Business Strip Royalty Total Business Strip Royalty
Ended Products Products Revenue Net Sales Products Products Revenue
- --------------------------------------- -------- -------- -------- --------- -------- -------- --------
March 30, 2003 ........................ $ 32.3 $ 32.5 $ 3.0 $ 67.8 47.7% 47.9% 4.4%
June 29, 2003 ......................... -- 27.5 3.0 30.5 -- 90.2 9.8
September 28, 2003 .................... -- 29.6 3.0 32.6 -- 90.8 9.2
December 31, 2003 ..................... 1.3 39.1 3.0 43.4 3.0 90.1 6.9
-------- -------- -------- -------- ---- ---- ---
$ 33.6 $ 128.7 $ 12.0 $ 174.3 19.3% 73.8% 6.9%
======== ======== ======== ======== ==== ==== ===
March 28, 2004 ........................ $ -- $ 49.9 $ 3.2 $ 53.1 --% 94.0% 6.0%
June 27, 2004 ......................... -- 57.0 3.2 60.2 -- 94.7 5.3
September 26, 2004 .................... -- 64.8 3.2 68.0 -- 95.3 4.7
-------- -------- -------- -------- ---- ---- ---
$ -- $ 171.7 $ 9.6 $ 181.3 --% 94.7% 5.3%
======== ======== ======== ======== ==== ==== ===
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
Net Sales
Net sales for the third quarter of 2004 were $68.0 million. This
represents an increase of 108% compared to $32.6 million of net sales for the
third quarter of 2003. The increase in net sales in the third quarter of 2004 as
compared to the third quarter of 2003 is primarily due to higher unit sales
resulting from improvement in customer demand for our products. We anticipate
our net sales for the fourth quarter of 2004 to range between $68.0 million and
$71.0 million.
Net sales of RTP and strip systems, spares and services for the third
quarter of 2004 were approximately $64.8 million. This represents an increase of
119% compared to $29.6 million of net sales for such products in the third
quarter of 2003. The increase in net sales of RTP and strip products in the
third quarter of 2004 as compared to the third quarter of 2003 is primarily due
to higher unit sales. Units of RTP and strip products shipped in the third
quarter of 2004 increased 139.1% as compared to the third quarter of 2003.
Net sales for the first nine months of 2004 were $181.3 million,
representing an increase of 38% compared to net sales of $130.9 million for the
first nine months of 2003. This increase was primarily due to higher shipments
in the first nine months of 2004 than in the same period in the prior year,
resulting from improvement in demand for both RTP and strip products. Net sales
for the first nine months of 2004 include no sales of Wet Business products,
whereas net sales for the first nine months of 2003 included $32.3 million in
net sales from the divested Wet Business. Net sales of RTP and strip products
for the first nine months of 2004 were $171.7 million, representing an increase
of 92% as compared to net sales of such products of $89.6 million for the first
nine months of 2003. Units of RTP and strip products shipped in the first nine
months of 2004 increased 93% as compared to the same period in 2003. This
increase was primarily due to increased customer demand closely correlated with
improvement in industry-wide demand in our broader market.
In the third quarter of 2004, two of our customers accounted for 12.4% and
11.0%, respectively of our net sales. In the third quarter of 2003, three of our
customers accounted for 10%, 13% and 15% of our net sales. During the first nine
months of 2004, two of our customers accounted for 12.1% and 11.7% of our net
sales, respectively. During the first nine months of 2003, two customers
accounted for 13% and 21% of net sales.
International sales, which are predominantly to customers based in Europe,
Japan and the Pacific Rim (which includes Taiwan, China, Korea and Singapore),
accounted for 87.3% and 88.3% of net sales for the third quarters of 2004 and
2003, respectively. International sales accounted for 88.5% and 84.5% of net
sales for the first nine months of 2004 and 2003, respectively. We anticipate
that international sales will continue to account for a significant portion of
net sales through the first half of 2005.
Gross Margin
Our gross margin for the third quarter of 2004 was 45.2%, an increase from
39.1% for the third quarter of 2003. The increase in gross margin in the third
quarter of 2004 was primarily due to a seven percentage point improvement in
increased absorption of fixed overhead costs resulting from increased production
volume. Gross margin in the fourth quarter is expected to be in the range of
approximately 43.0% to 46.0%.
Our gross margin for the first nine months of 2004 was 43.7%, an increase
from 33.9% for the first nine months of 2003. The increase in gross margin in
the first nine months of 2004 was primarily due to a nine percentage point
improvement in increased absorption of fixed overhead costs resulting from
increased production volume, as well as the divestiture of the Wet Business.
Our RTP and strip products have relatively higher gross margins than did
the Wet Business products we offered until its divestiture in March 2003. The
divestiture of our Wet Business affects the comparability of our gross margin in
the current nine-month period and will affect the comparability of our gross
margins in future periods to our historical margins.
Due to intense competition, we continue to face pricing pressure from
competitors that can affect our gross margin. In response, we are continuing
with our cost controls and efforts to differentiate our product portfolio. Our
gross margin has varied over the years and will continue to vary based on many
factors, including competitive
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
pressures, product mix, the relative amounts of customer acceptances in a given
quarter, economies of scale, overhead absorption levels and costs associated
with the introduction of new products.
Research, Development and Engineering
Research, development and engineering expenses for the third quarter of
2004 were $5.6 million, or 8.3% of net sales, as compared to $4.5 million, or
13.7% of net sales for the third quarter of 2003. The $1.1 million increase in
research, development and engineering expenses for the third quarter of 2004 as
compared to the same quarter of 2003 was primarily due to reimbursable expenses
from a joint development project. The net change from the third quarter of 2003
as compared to the third quarter of 2004 was $1.5 million and resulted from the
fulfillment of our joint development program. This was partially offset by a
$0.1 million increase in payroll-related expenses. The decrease in research,
development and engineering expenses as a percentage of net sales for the third
quarter of 2004 as compared to the same quarter of 2003 resulted from the
proportionately greater increase in net sales.
Research, development and engineering expenses for the first nine months
of 2004 were $16.0 million, or 8.8% of net sales, as compared to $18.7 million,
or 14.3% of net sales, for the first nine months of 2003. The $2.7 million
decrease in research, development and engineering expenses in the first nine
months of 2004 as compared to the first nine months of 2003 was primarily due to
a $2.7 million reduction in project materials and project-related expenses
resulting from cost reimbursement on a joint development project, a $1.2 million
reduction in depreciation and amortization resulting from the consolidation of
our facilities and the disposition of our Wet business, partially offset by a
$0.5 million increase in salary and payroll-related expenses and a $0.4 million
increase in outside professional services. The decrease in research, development
and engineering expenses as a percentage of net sales for the first nine months
of 2004 as compared to the same period in 2003 resulted from the proportionately
greater increase in net sales and the reduction in expenses on an absolute
dollar basis.
Selling, General and Administrative
Selling, general and administrative expenses for the third quarter of 2004
were $15.0 million, or 22.0% of net sales, as compared to $12.6 million, or
38.7% of net sales, for the third quarter of 2003. The $2.3 million increase in
selling, general and administrative expenses in the third quarter of 2004 as
compared to the third quarter of 2003 is primarily due to a $2.1 million
increase in salary and payroll-related expenses resulting from increased
headcount and variable compensation expenses. The decrease in selling, general
and administrative expenses as a percentage of net sales for the third quarter
of 2004, as compared to the same period in 2003, resulted from the
proportionately greater increase in net sales.
Selling, general and administrative expenses for the first nine months of
2004 were $41.3 million, or 22.8% of net sales as compared to $42.3 million, or
32.3% of net sales for the first nine months of 2003. The $1.0 million decrease
in selling, general and administrative expenses in the first nine months of 2004
as compared to the first nine months of 2003 is primarily due to a $0.7 million
decrease in salaries and payroll-related expenses reflecting our continuing cost
containment efforts and a $0.7 million decrease in sales and service costs.
Amortization of Intangibles
Upon adoption of SFAS No. 142 on January 1, 2002, we no longer amortize
goodwill. We continue to amortize the identified intangibles, and our
amortization expense during the third quarter of 2004 and first nine months of
2004 were $0.3 million and $1.0 million, respectively. Our amortization expense
during the third quarter of 2003 and the first nine months of 2003 were $.03
million and $1.8 million, respectively. We estimate that our amortization
expense will be approximately $1.3 million for each of the years 2004 and 2005.
Restructuring and other charges
During the third quarter of 2003, we recorded restructuring and other
charges of $489,000 that included $381,000 for workforce reduction and $108,000
for consolidation of excess facilities. We estimate that expected cost savings
as a result of the restructuring and workforce reduction will range from $0.4
million to $0.5 million per quarter. For the three and nine months ended
September 26, 2004, no restructuring expenses were recorded.
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
Interest and Other Income (Expense), Net
Interest and other income, net, for the third quarter of 2004 was
approximately $0.3 million, or 0.5% of net sales, as compared to interest and
other expense, net, of $1.3 million, or 3.9% of net sales, for the third quarter
of 2003. During the third quarter of 2004, interest and other income, net
consisted primarily of interest income of $0.4 million resulting from the
investment of our cash balances in interest-bearing accounts. During the third
quarter of 2003, interest and other income, net, consisted primarily of interest
income of $0.3 million resulting from the investment of our cash balances in
interest-bearing accounts, a foreign exchange gain of $0.9 million, and net
other income of $0.5 million, partially offset by a loss on sale of fixed assets
of $0.4 million.
Interest and other expense, net, for the first nine months of 2004 was
approximately $0.2 million, or 0.1% of net sales, as compared to $0.9 million,
or 0.7% of net sales, for the first nine months of 2003. During the first nine
months of 2004, interest and other expense, net, consisted primarily of interest
income of $0.9 million resulting from the investment of our cash balances in
interest-bearing accounts, partially offset by other expense of $0.6 million. In
the same period of 2003, other income consisted of interest income of $0.9
million resulting from the investment of our cash balances, a foreign exchange
gain of $0.1 million and net other income of $0.9 million, partially offset by
interest expense of $0.1 million and a loss on sale of fixed assets of $1.0
million.
Provision for Income Taxes
In the third quarter of 2004, we recorded income tax expense of
approximately $1,000, which consisted of foreign taxes incurred by its foreign
sales and service operations of approximately $24,000, foreign withholding taxes
on royalty income of $72,000, and federal and state income taxes of
approximately $30,000, partially offset by a deferred tax benefit on the
amortization of certain intangible assets of $125,000. The effective income tax
rate was 0.5% for the third quarter of 2004. In the first nine months of 2004,
we recorded income tax expense of approximately $309,000, which consisted of
foreign taxes of approximately $563,000, and federal and state income taxes of
approximately $120,000, partially offset by a deferred tax benefit on the
amortization of certain intangible assets of $374,000. The effective income tax
rate was 2.8% for the six months ended September 26, 2004. At September 26,
2004, we have provided a full valuation allowance against our net deferred tax
asset as management believes that sufficient uncertainty exists with regard to
the realizability of tax assets. Factors considered in providing a valuation
allowance include the lack of a significant history of consistent profits and
the lack of carryback capacity to realize these assets. Based on the absence of
objective evidence, our management is unable to assert that it is more likely
than not that we will generate sufficient taxable income to realize all our net
deferred tax assets.
In the third quarter of 2003, we recorded an income tax benefit of
approximately $21,000, and an income tax provision of approximately $0.1 million
for the first nine months of 2003, which consisted of foreign withholding taxes
of $0.6 million, foreign taxes incurred by our foreign sales and service
operations of $0.1 million, and state income taxes of approximately $0.1
million, partially offset by a deferred tax benefit on the amortization of
certain intangible assets of $0.7 million. We had no U.S. or German current
income tax benefit or expense. Our effective income tax rate was a negative 0.6%
for the nine months ended September 28, 2003.
Liquidity and Capital Resources
Our cash and cash equivalents, excluding restricted cash, were $80.5
million at September 26, 2004, an increase of $3.4 million from $77.1 million at
December 31, 2003. Stockholders' equity at September 26, 2004 was $151.8
million, as compared to $83.7 million at December 31, 2003. Working capital at
September 26, 2004 was $118.1 million, as compared to $56.9 million at December
31, 2003. At September 26, 2004, we had no long-term debt.
On December 23, 2003, we filed a shelf registration statement on Form S-3
that would allow us to sell, from time-to-time, up to $100 million of our common
stock or other securities. The shelf registration statement also covered sales
of up to 5.9 million of the already outstanding shares of our common stock owned
by STEAG. The registration statement was declared effective by the SEC on
January 9, 2004.
On February 17, 2004, we sold approximately 4.3 million newly issued
shares of common stock, and STEAG sold approximately 4.3 million already
outstanding shares of our common stock, in an underwritten public offering
priced at $11.50 per share. This resulted in proceeds to us, net of underwriting
discounts and transaction expenses,
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
through the third quarter of 2004, of approximately $46.4 million. Out of the
gross proceeds from the sale of common stock by us of approximately $49.6
million, approximately $2.5 million represented underwriting discounts and
commissions, and there were other costs and expenses of approximately $0.6
million, primarily for legal, accounting and printing services, through the
third quarter of 2004. We estimate our net proceeds to be approximately $46.3
million after payment in future periods of the balance of the transaction costs.
We intend to use the net proceeds received from the offering for general
corporate purposes, including working capital requirements and potential
strategic acquisitions or investments. We did not receive any proceeds from the
sale of shares by STEAG. STEAG remained our largest single shareholder, holding
approximately 8.9 million, or 17.7%, of the 50.0 million then outstanding shares
of our common stock.
Our Japanese subsidiary has a credit facility with a Japanese bank in the
amount of 900 million Yen (approximately $8.2 million at September 26, 2004),
collateralized by specific trade accounts receivable of the Japanese subsidiary.
At September 26, 2004, there were no borrows outstanding under this credit
facility. The facility bears interest at a per annum rate of TIBOR plus 75 basis
points (0.80% at September 26, 2004). The facility expires on June 20, 2005. We
have given a corporate guarantee for this credit facility. There are no
financial covenant requirements for this credit facility.
We have a revolving line of credit with a U.S. bank in the amount of $20.0
million, which expires on April 26, 2005. All borrowings under this credit line
bear interest at a per annum rate equal to the bank's prime rate plus 125 basis
points (6% at September 26, 2004). The line of credit is collateralized by a
blanket lien on all of our domestic assets including intellectual property. The
line of credit requires us to satisfy certain quarterly financial covenants,
including maintaining a minimum balance of unrestricted cash and cash
equivalents and a minimum balance of investment accounts, and not exceeding a
maximum net loss limit. At September 26, 2004, we were in compliance with the
covenants and there were no borrowings under this credit line.
We had losses from operations in each of fiscal years 2001, 2002 and 2003.
However, as a result of our restructurings and divestitures, we reduced our cost
structure and our rate of losses decreased over the course of that period.
During the fourth quarter of 2003 and during the first three quarters of 2004,
we have been operationally profitable. With the recent improvements in our
operating results and the additional cash provided by the stock offering in the
first quarter of 2004, we believe we have adequate liquidity and capital
resources for our operations for the next twelve months.
On June 24, 2002, we entered into a settlement agreement and a cross
license agreement with DNS under which DNS agreed to make payments to us
totaling between a minimum of $75 million and a maximum of $105 million,
relating to past damages, partial reimbursement of attorney's fee and costs, and
license fees. The license fee obligations of DNS would cease if all four patents
that had been the subject of the lawsuit were to be held invalid by a court.
As of September 26, 2004, DNS had made payments aggregating $57.4 million
under the terms of the settlement and license agreements. Of the $57.4 million
paid by DNS as of September 26, 2004, $4.6 million was withheld to pay Japanese
withholding tax, and the net amount we received was $52.8 million. In future
periods, we are scheduled to receive minimum royalty payments as follows (in
millions):
Future
DNS Minimum
Payments
Fiscal Period to be Received
------------- --------------
April 2005 $ 6.0
April 2006 6.0
April 2007 6.0
-------
$ 18.0
=======
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
Cash Flows
The net cash used in operating activities during the nine months ended
September 26, 2004 totaled $33.0 million, and was primarily attributable to an
increase in accounts receivable, net, of $28.5 million, an increase in
inventories of $24.7 million, a decrease in accrued liabilities of $7.1 million
and a decrease in deferred revenue of $6.5 million. The cash used in operating
activities was offset by net income of $20.9 million, a decrease in advanced
billings of $6.3 million, an increase in accounts payable of $3.1 million, a
decrease in inventories - delivered systems of $1.6 million and non-cash
depreciation and amortization of $4.9 million. The increase in accounts
receivable, net, was due to the high volume of shipments toward the end of the
quarter, while days sales outstanding declined slightly as compared to days
sales outstanding at December 31, 2003. The inventory increased proportionately
to build plan requirements, while inventory turns declined slightly during the
nine-month period ended September 26, 2004.
The net cash used in operating activities during the nine months ended
September 28, 2003 totaled $9.3 million, and was primarily attributable to a net
loss of $29.4 million, a decrease in deferred revenue of $32.1 million, a
decrease in accrued liabilities of $6.0 million, and a decrease in accounts
payable of $6.0 million. The cash used in operating activities was offset by a
decrease in inventories and inventories - delivered systems of $21.9 million, a
decrease in accounts receivable and advanced billings of $23.7 million, the loss
on disposition of Wet Business of $10.3 million, the non-cash depreciation and
amortization of intangibles of $6.6 million and a decrease in prepaid expenses
and other current assets of $1.5 million.
Net cash used in investing activities was $10.9 million during the nine
months ended September 26, 2004, as compared to $1.9 million used in investing
activities during the same period last year. The net cash used in investing
activities during the nine months ended September 26, 2004 was attributable to
purchases of property and equipment. The net cash used in investing activities
during the nine months ended September 28, 2003 was attributable to the purchase
of property and equipment of $3.9 million, offset by proceeds from the
disposition of the Wet Business of $2.0 million.
Net cash provided by financing activities was $47.5 million during the
nine months ended September 26, 2004, as compared to $2.1 million during the
same period last year. The net cash provided by financing activities during the
nine months ended September 26, 2004 was primarily attributable to the sale of
approximately 4.3 million shares of the company's newly issued common stock in
an underwritten public offering at $11.50 per share with proceeds, net of
expenses through the third quarter of 2004, of $46.4 million. The net cash
provided by financing activities during the nine months ended September 28, 2003
was primarily attributable to net borrowing against our Japanese line of credit
in the amount of net $1.1 million, restricted cash of $0.6 million, and proceeds
from the issuance of common stock of $0.4 million.
Based on current projections, we believe that our current cash and
investment positions together with cash provided by operations will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures for at least the next twelve months.
Our operating plans are based on and require us to improve our operating
profits, control expenses, manage inventories, and collect accounts receivable
balances. As a result of the cyclical nature of the semiconductor industry, we
are exposed to a number of challenges and risks, including delays in payments of
accounts receivable by customers, and postponements or cancellations of orders.
Postponed or cancelled orders can cause excess inventory and underutilized
manufacturing capacity. If we are not able to sustain profitability over the
upcoming quarters, the operating losses could adversely affect cash and working
capital balances, and we may be required to seek additional sources of financing
through public or private financing, or other sources, to fund operations. We
may not be able to obtain adequate or favorable financing when needed. Failure
to raise capital when needed could harm our business. When additional funds are
raised through the issuance of equity securities, the percentage ownership of
our stockholders is reduced, and these equity securities may have rights,
preferences or privileges senior to our common stock. Any additional equity
financing may be dilutive to stockholders, and debt financing, if available, may
involve restrictive covenants on the Company's operations and financial
condition.
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
Factors That May Affect Future Results And Market Price Of Stock
In this report and from time to time, we may make forward looking statements
regarding, among other matters, our anticipated sales and gross margins in
future periods, our future strategy, product development plans, productivity
gains of our products, financial performance and growth. The forward-looking
statements are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Forward looking statements address
matters which are subject to a number of risks and uncertainties which could
cause actual results to differ materially, including those set forth in our
Annual Report on Form 10-K, all of which are incorporated here by reference, in
addition to the following:
The semiconductor equipment industry is highly cyclical, periodically has
severe and prolonged downturns, and causes our operating results to
fluctuate significantly. We are exposed to the risks associated with
industry overcapacity, including reduced capital expenditures, decreased
demand for our products, increased price competition and delays by our
customers in paying for our products.
The semiconductor industry is highly cyclical and has historically
experienced periodic downturns, whether the result of general economic changes
or capacity growth temporarily exceeding growth in demand for semiconductor
devices. Our business depends in significant part upon capital expenditures by
manufacturers of semiconductor devices, including manufacturers that open new or
expand existing facilities. Periods of overcapacity and reductions in capital
expenditures by our customers cause decreases in demand for our products. If
existing fabrication facilities are not expanded or new facilities are not
built, demand for our systems may not develop or increase, and we may be unable
to generate significant new orders for our systems. If we are unable to develop
new orders for our systems, we will not achieve anticipated net sales levels.
During periods of declining demand for semiconductor manufacturing equipment,
our customers typically reduce purchases, delay delivery of ordered products
and/or cancel orders, resulting in reduced revenues and backlog, delays in
revenue recognition, and excess inventory. Increased price competition may
result, causing pressure on gross margin and net income.
The onset of another market downturn is difficult to predict and may occur
suddenly. During the latest downturn, we were unable to reduce our expenses
quickly enough to avoid incurring losses. For the years ended December 31, 2001
and 2002 and 2003, our net loss was $336.7 million, $94.3 million and $28.4
million, respectively, compared to net income of $1.5 million for the year ended
December 31, 2000. In the event of a future downturn, if we are unable to
effectively align our cost structure with prevailing market conditions, we could
again experience losses, and may be required to undertake additional
cost-cutting measures, and be unable to continue to invest in marketing,
research and development and engineering at the levels we believe are necessary
to maintain our competitive position in our remaining core businesses. Our
failure to make these investments could seriously harm our long-term business
prospects.
We depend on large purchases from a few customers, and any cancellation,
reduction or delay of purchases by, or failure to collect receivables
from, these customers could harm our business.
Currently, we derive most of our revenues from the sale of a relatively
small number of systems to a relatively small number of customers, which makes
our relationship with each customer critical to our business. The list prices on
our systems range from $500,000 to over $2.2 million. Consequently, any order
cancellations, delays in scheduled shipments, delays in customer acceptances or
delays in collection of accounts receivable could materially adversely affect
our operating results and cause such results to fall below our expectations and
the expectations of market analysts or investors.
Our list of major customers changes substantially from year to year, and
we cannot predict whether a major customer in one year will make significant
purchases from us in future years. Additionally, our customers' capital budget
considerations and our lengthy sales cycle make the timing of customer orders
uneven and difficult to predict. Accordingly, it is difficult for us to
accurately forecast our revenues and operating results from year to year. If we
are unable to collect a receivable from a large customer, our financial results
will be negatively impacted.
Our backlog orders are subject to cancellation or delay.
Although we maintain a backlog of customer orders expected to be filled
within 12 months, customers may request cancellations or delivery delays. As a
result, our backlog may not be a reliable indication of our future revenues. If
shipments of orders in backlog are cancelled or delayed, our revenues could fall
below our expectations and the expectations of market analysts and investors.
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
Delays or technical and manufacturing difficulties incurred in the
introduction of new products could be costly and adversely affect our
customer relationships.
Our success depends in part on the continual introduction of new and
improved systems and processes. Our products are complex, and we may experience
delays and technical or manufacturing difficulties in the prototype introduction
of new systems and enhancements, or in volume production of new systems or
enhancements. Our inability to overcome such difficulties, or to meet the
technical specifications of any new systems or enhancements, or to manufacture
and ship these systems or enhancements in volume and in a timely manner, would
materially adversely affect our business and results of operations, as well as
our customer relationships. We may from time to time incur unanticipated costs
to ensure the functionality and reliability of our products early in their life
cycles, which costs can be substantial. If we encounter reliability or quality
problems with our new products or enhancements, we could face a number of
difficulties, including reduced orders, higher manufacturing costs, delays in
collection of accounts receivable, and additional service and warranty expenses,
all of which could materially adversely affect our business and results of
operations.
We may not achieve anticipated revenue growth if we are not selected as
"vendor of choice" for new or expanded fabrication facilities or if our
systems and products do not achieve broader market acceptance.
Because semiconductor manufacturers must make a substantial investment to
install and integrate capital equipment into a semiconductor fabrication
facility, these manufacturers will tend to choose semiconductor equipment
manufacturers based on established relationships, product compatibility, and
proven financial performance.
Once a semiconductor manufacturer selects a particular vendor's capital
equipment, the manufacturer generally relies for a significant period of time
upon equipment from this "vendor of choice" for the specific production line
application. In addition, the semiconductor manufacturer frequently will attempt
to consolidate its other capital equipment requirements with the same vendor.
Accordingly, we may face narrow windows of opportunity to be selected as the
"vendor of choice" by substantial new customers. It may be difficult for us to
sell to a particular customer for a significant period of time once that
customer selects a competitor's product, and we may not be successful in
obtaining broader acceptance of our systems and technology. If we are unable to
achieve broader market acceptance of our systems and technology, we may be
unable to grow our business and our operating results and financial condition
will be adversely affected.
We must continually anticipate technology trends, improve our existing
products and develop new products in order to be competitive, and the
development of new or enhanced products involves significant risk and
cost.
The markets in which we and our customers compete are characterized by
rapidly changing technology, evolving industry standards, and continuous
improvements in products and services. Consequently, our success depends upon
our ability to anticipate future customer needs, to develop new systems and
processes that meet customer requirements and industry standards and that
compete effectively on the basis of price and performance, and to continually
improve our existing systems and processes.
The development and manufacture of new products involves significant risk,
since the products are very complex and the development cycle is long and
expensive. The success of any new systems we develop and introduce is dependent
on a number of factors, including our ability to correctly predict customer
requirements for new processes, assess and select alternative technologies for
research and development, and timely complete new system designs that are
acceptable to the market. We may make substantial investments in new
technologies before we can know whether they are technically or commercially
feasible or advantageous, and without any assurance that revenue from future
products or product enhancements will be sufficient to recover the associated
development costs. Not all development activities result in commercially viable
products. We may be adversely affected by manufacturing inefficiencies and the
challenge of producing innovative systems in volume which meet customer
requirements. We may not be able to improve our existing systems or develop new
technologies or systems in a timely manner. We may exceed the budgeted cost of
reaching our research, development and engineering objectives, and planned
product development schedules may require extension. Any delays or additional
development costs could have a material adverse effect on our business and
results of operations.
29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
We are engaged in the implementation of a new enterprise resource planning
system, which may be more difficult or costly than anticipated, and could
cause disruption to the management of our business and the preparation of
our financial statements.
We are currently engaged in the implementation of a new enterprise
resource planning, or ERP, system, which is expected to become integral to our
ability to accurately and efficiently maintain our books and records, record our
transactions, provide critical information to our management, and prepare our
financial statements. However, the new ERP system could be more costly,
difficult and time consuming to purchase and implement than we currently
anticipate. In addition, implementation of the new ERP system requires us to
change our internal business practices, transfer records to a new computer
system and train our employees in the correct use of and input of data into the
system, which could result in disruption of our procedures and controls and
difficulties achieving accuracy in the conversion of data. If we fail to manage
these changes effectively, our operations could be disrupted, which could result
in the diversion of management's attention and resources, cause us to improperly
state or delay reporting of our financial results, materially and adversely
affect our operating results, and impact our ability to manage our business. In
addition, to manage our business effectively, we may need to implement
additional and improved management information systems, further develop our
operating, administrative, financial and accounting systems and controls, add
experienced senior level managers, and maintain closer coordination among our
executive, engineering, accounting, marketing, sales and operations
organizations. We may incur additional unexpected costs and our systems,
procedures or controls may not be adequate to support our operations.
Because of our recent implementation of a new ERP system and the limited
time remaining in 2004 to complete the procedures required to comply with
new requirements under Section 404 of the Sarbanes-Oxley Act for
evaluation and attestation of internal control over financial reporting,
we may not be able to comply with those requirements in the permitted
time.
Rules adopted by the Securities and Exchange Commission to implement
Section 404 of the Sarbanes-Oxley Act of 2002 (the "Rules") will require us to
assess the design and operating effectiveness of our internal control over
financial reporting and to include in our Annual Report on Form 10-K for the
year ending December 31, 2004 (i) a report from our management, (ii) a statement
that our registered independent auditors have issued an attestation report on
our management assessment of internal control over financial reporting and (iii)
a copy of the registered independent auditors' attestation report. In order to
achieve compliance with the new Rules within the required timeframe, we have
been conducting a process to document and evaluate our internal control systems
and procedures since early in 2004. In parallel with that process, we planned to
implement a new enterprise resource planning, or ERP, system. In the latest
phase of implementation, we switched our Fremont headquarters over to the new
ERP system in October of 2004. Following that implementation, all the affected
internal control processes and activities need to be re-documented, evaluated
and tested, together with any remediation steps that need to be taken if control
deficiencies are noted. Because of the limited time remaining in 2004 to
complete the required procedures, there is a significant possibility that our
management or our independent auditors may not be able to complete their
assessment in the permitted time. If our management is either unable to complete
its assessment in a timely manner or to assess our internal control over
financial reporting as effective, or if our independent registered public
accountants issue an adverse opinion, or disclaim an opinion, relating to the
attestation requirements of Section 404, we may be unable to comply with the
Rules, and investor confidence in the reliability of our internal controls over
financial reporting may be negatively effected.
Our results of operations may suffer if we do not effectively manage our
inventory.
We need to manage our inventory of component parts and finished goods
effectively to meet customer delivery demands at an acceptable risk and cost.
Customers are increasingly requiring very short lead times for delivery, which
may require us to purchase and carry additional inventory. For both the
inventories that support manufacture of our products and our spare parts
inventories, if anticipated customer demand does not materialize in a timely
manner, we will incur increased carrying costs and some inventory could become
unsaleable or obsolete, resulting in write-offs which would adversely affect the
results of our operations.
Warranty claims in excess of our projections could seriously harm our
business.
We offer a warranty on our products. The cost associated with our warranty
is significant, and in the event our projections and estimates of this cost are
inaccurate our financial performance could be seriously harmed. In addition, if
we experienced product failures at an unexpectedly high level, our reputation in
the marketplace could be damaged, customers may decline to place new or
additional orders with us, and our business would suffer.
30
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
We are increasingly outsourcing manufacturing and logistics activities to
third party service providers, which decreases our control over the
performance of these functions.
We have already outsourced certain manufacturing and spare parts logistics
functions to third party service providers, and may outsource more of those
functions in the future. While we expect to achieve operational flexibility and
cost savings as a result of this outsourcing, outsourcing has a number of risks
and reduces our control over the performance of the outsourced functions.
Significant performance problems by these third party service providers could
result in cost overruns, delayed deliveries, shortages, quality issues or other
problems which could result in significant customer dissatisfaction and could
materially and adversely affect our business, financial condition and results of
operations.
If for any reason one or more of these third party service providers
becomes unable or unwilling to continue to provide services of acceptable
quality, at acceptable costs and in a timely manner, our ability to deliver our
products or spare parts to our customers could be severely impaired. We would
quickly need to identify and qualify substitute service providers or increase
our internal capacity, which could be expensive, time consuming and difficult
and could result in unforeseen operations problems. Substitute service providers
might not be available or, if available, might be unwilling or unable to offer
services on acceptable terms.
If customer demand for our products increases, we may be unable to secure
sufficient additional capacity from our current service providers on
commercially reasonable terms, if at all.
Our requirements are expected to represent a small portion of the total
capacities of our third party service providers, and they may preferentially
allocate capacity to other customers, even during periods of high demand for our
products. In addition, such manufacturers could suffer financial difficulties or
disruptions in their operations due to causes beyond our control.
We may not be able to continue to successfully compete in the highly
competitive semiconductor equipment industry.
The semiconductor equipment industry is both highly competitive and
subject to rapid technological change. Significant competitive factors include
the following:
o system performance;
o cost of ownership;
o size of installed base;
o breadth of product line;
o delivery availability; and
o customer support.
Competitive pressure has been increasing in several areas. In particular,
there is increased price competition, and customers are delaying purchase
commitments, which are then placed with demands for rapid delivery dates and
increased product support.
Our major competitors are larger than we are, have greater capital
resources, and may have a competitive advantage over us by virtue of having:
o broader product lines;
o longer operating history;
o greater experience with high volume manufacturing;
o substantially larger customer bases;
o the ability to reduce price through product bundling;
o substantially greater customer support resources; and
o substantially greater financial, technical, and marketing resources.
31
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
In addition, to expand our sales we must often replace the systems of our
competitors or sell new systems to customers of our competitors. Our competitors
may develop new or enhanced competitive products that will offer price or
performance features that are superior to our systems. Our competitors may also
be able to respond more quickly to new or emerging technologies and changes in
customer requirements, or to devote greater resources to the development,
promotion, sale and on-site customer support of their product lines. We may not
be able to maintain or expand our sales if competition increases and we are
unable to respond effectively.
Our lengthy sales cycle increases our costs and reduces the predictability
of our revenue.
Sales of our systems depend upon the decision of a prospective customer to
increase or replace manufacturing capacity, typically involving a significant
capital commitment. Accordingly, the decision to purchase our systems requires
time consuming internal procedures associated with the evaluation, testing,
implementation, and introduction of new technologies into our customers'
manufacturing facilities. Even after the customer determines that our systems
meet their qualification criteria, we experience delays finalizing system sales
while the customer obtains approval for the purchase and constructs new
facilities or expands its existing facilities. Consequently, the time between
our first contact with a customer regarding a specific potential purchase and
the customer's placing its first order may last from nine to twelve months or
longer. We may incur significant sales and marketing expenses during this
evaluation period. In addition, the length of this period makes it difficult to
accurately forecast future sales. If sales forecasted from a specific customer
are not realized, we may experience an unplanned shortfall in revenues and our
quarterly and annual revenue and operating results may fluctuate significantly
from period to period.
We are highly dependent on international sales, and face significant
economic and regulatory risks because a majority of our net sales are from
outside the United States.
Our international sales accounted for 87% of our net sales in 2003, 74% in
2002 and 78% in 2001 and we anticipate international sales will continue to
account for a significant portion of our future net sales. Asia has been a
particularly important region for our business, and we anticipate that it will
continue to be important as we expand our sales and marketing efforts by opening
an office in China. Our sales to customers located in Taiwan, Japan, other Asian
countries and recently China accounted for 71% of our net sales in 2003, 47% in
2002 and 47% in 2001. Because of our continuing dependence upon international
sales, we are subject to a number of risks associated with international
business activities, including:
o unexpected changes in law or regulations resulting in more
burdensome governmental controls, tariffs, restrictions, embargoes,
or export license requirements;
o exchange rate volatility;
o the need to comply with a wide variety of foreign and U.S. export
laws;
o political and economic instability, particularly in Asia;
o differing labor regulations;
o reduced protection for intellectual property;
o difficulties in accounts receivable collections;
o difficulties in managing distributors or representatives;
o difficulties in staffing and managing foreign subsidiary operations;
and
o changes in tariffs or taxes.
In the U.S. and Asia (excluding Japan), our sales to date have been
denominated primarily in U.S. dollars, while our sales in Japan are usually
denominated in Japanese Yen. Our sales to date in Europe have been denominated
in various currencies, currently primarily U.S. dollars and the Euro. Our sales
in foreign currencies are subject to risks of currency fluctuation. For U.S.
dollar sales in foreign countries, our products become less price-competitive
where the local currency is declining in value compared to the dollar. This
could cause us to lose sales or force us to lower our prices, which would reduce
our gross margins.
In addition, the expenses of our German manufacturing operation are
primarily incurred in euros. If the euro were to appreciate in relation to the
U.S. dollar, our operating expenses would increase.
32
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
We depend upon a limited number of suppliers for some components and
subassemblies, and supply shortages or the loss of these suppliers could
result in increased cost or delays in manufacture and sale of our
products.
We rely to a substantial extent on outside vendors to provide many of the
components and subassemblies of our systems. We obtain some of these components
and subassemblies from a sole source or a limited group of suppliers. Because of
our anticipated reliance on outside vendors generally, and on a sole or a
limited group of suppliers in particular, we may be unable to obtain an adequate
supply of required components. Although we currently experience minimal delays
in receiving goods from our suppliers, when demand for semiconductor equipment
is strong, our suppliers may have difficulty providing components on a timely
basis.
In addition, during periods of shortages of components, we may have
reduced control over pricing and timely delivery of components. We often quote
prices to our customers and accept customer orders for our products prior to
purchasing components and subassemblies from our suppliers. If our suppliers
increase the cost of components or subassemblies, we may not have alternative
sources of supply and may no longer be able to increase the cost of the system
being evaluated by our customers to cover all or part of the increased cost of
components.
The manufacture of some of these components and subassemblies is an
extremely complex process and requires long lead times. If we are unable to
obtain adequate and timely deliveries of our required components or
subassemblies, we may have to seek alternative sources of supply or manufacture
such components internally. This could delay our ability to manufacture or
timely ship our systems, causing us to lose sales, incur additional costs, delay
new product introductions, and harm our reputation.
We manufacture many of our products at two primary manufacturing
facilities and are thus subject to risk of disruption.
Although we outsource the manufacturing for certain of our products to
third parties, we continue to produce our latest generation products at our two
principal manufacturing plants in Fremont, California and Dornstadt, Germany. We
have limited ability to interchangeably produce our products at either facility,
and in the event of a disruption of operations at one facility, our other
facility would not be able to make up the capacity loss. Our operations are
subject to disruption for a variety of reasons, including, but not limited to
natural disasters, work stoppages, operational facility constraints and
terrorism. Such disruption thus could cause delays in shipments of products to
our customers, result in cancellation of orders or loss of customers and
seriously harm our business.
Because of competition for qualified personnel, we may not be able to
recruit or retain necessary personnel, which could impede development or
sales of our products.
Our growth will depend on our ability to attract and retain qualified,
experienced employees. There is substantial competition for experienced
engineering, technical, financial, sales, and marketing personnel in our
industry. In particular, we must attract and retain highly skilled design and
process engineers. Historically, competition for such personnel has been intense
in all of our locations, but particularly in the San Francisco Bay Area where
our headquarters is located. If we are unable to retain existing key personnel,
or attract and retain additional qualified personnel, we may from time to time
experience inadequate levels of staffing to develop and market our products and
perform services for our customers. As a result, our growth could be limited due
to our lack of capacity to develop and market our products to our customers, or
we could fail to meet our delivery commitments or experience deterioration in
service levels or decreased customer satisfaction.
If we are unable to protect our intellectual property, we may lose a
valuable asset and experience reduced market share. Efforts to protect our
intellectual property may require additional costly litigation.
We rely on a combination of patents, copyrights, trademark and trade
secret laws, non-disclosure agreements, and other intellectual property
protection methods to protect our proprietary technology. Despite our efforts to
protect our intellectual property, our competitors may be able to legitimately
ascertain the non-patented proprietary technology embedded in our systems. If
this occurs, we may not be able to prevent the use of such technology. Our means
of protecting our proprietary rights may not be adequate and our patents may not
be sufficiently broad to protect our technology. Any patents owned by us could
be challenged, invalidated, or circumvented and any rights granted under any
patent may not provide adequate protection to us. Furthermore, we may not have
sufficient resources to protect our rights. Our competitors may independently
develop similar technology, or design around patents that may be issued to us.
In addition, the laws of some foreign countries may not protect our proprietary
rights to as great an extent as do the laws of the United States and it may be
more difficult to monitor the use of our
33
products in such foreign countries. As a result of these threats to our
proprietary technology, we may have to resort to costly litigation to enforce
our intellectual property rights.
We might face patent infringement or other intellectual property
infringement claims that may be costly to resolve and could divert
management attention.
We may from time to time be subject to claims of infringement of other
parties' patents or other proprietary rights. In addition, we on occasion
receive notification from customers who believe that we owe them indemnification
or other obligations related to infringement claims made against the customers
by third parties. Our involvement in any patent dispute or other intellectual
property dispute or action to protect trade secrets, even if the claims are
without merit, could be very expensive to defend and could divert the attention
of our management. Adverse determinations in any litigation could subject us to
significant liabilities to third parties, require us to seek costly licenses
from third parties, and prevent us from manufacturing and selling our products.
Royalty or license agreements, if required, may not be available on terms
acceptable to us or at all. Any of these situations could have a material
adverse effect on our business and operating results in one or more countries.
Our failure to comply with environmental regulations could result in
substantial liability.
We are subject to a variety of federal, state, local, and foreign laws,
rules, and regulations relating to environmental protection. These laws, rules,
and regulations govern the use, storage, discharge, and disposal of hazardous
chemicals during manufacturing, research and development and sales
demonstrations. If we fail to comply with present or future regulations,
especially in our Fremont, California and Dornstadt, Germany manufacturing
facilities, we could be subject to substantial liability for clean up efforts,
personal injury, and fines or suspension or cessation of our operations. We may
be subject to liability if our acquired companies have past violations.
Restrictions on our ability to expand or continue to operate our present
locations could be imposed upon us or we could be required to acquire costly
remediation equipment or incur other significant expenses.
Future sales of shares by STEAG could adversely affect the market price of
our common stock.
There are approximately 51.4 million shares of our common stock
outstanding as of October 27, 2004, of which approximately 9.1 million (or
17.8%) are beneficially owned by STEAG Electronic Systems AG, or STEAG. STEAG
has indicated that it plans to reduce its ownership in our common stock over
time. If STEAG were to sell a large number of shares, the market price of our
common stock may decline. Moreover, the perception in the public markets that
such sales by STEAG might occur could also adversely affect the market price of
our common stock.
We incurred net operating losses for the years 2001 through 2003. We may
not achieve or maintain profitability on an annual basis.
We incurred net losses of approximately $336.7 million for the year ended
December 31, 2001, $94.3 million for the year ended December 31, 2002 and $28.4
million for the year ended December 31, 2003. Although we have been profitable
for the first nine months of 2004, we expect to continue to incur significant
research and development and selling, general and administrative expenses. We
may not achieve profitability in 2004 or future years. We will need to continue
to generate significant net sales to achieve and maintain profitability on an
annual basis, and we may not be able to do so.
Our quarterly operating results fluctuate significantly and are difficult
to predict, and may fall short of anticipated levels, which could cause
our stock price to decline.
Our quarterly revenue and operating results have varied significantly in
the past and are likely to vary significantly in the future, which makes it
difficult for us to predict our future operating results. A substantial
percentage of our operating expenses are fixed in the short term and we may be
unable to adjust spending to compensate for an unexpected shortfall in revenues.
As a result, any delay in generating or recognizing revenues could cause our
operating results to be below the expectations of market analysts or investors,
which could cause the price of our common stock to decline.
The price of our common stock has fluctuated in the past and may continue
to fluctuate significantly in the future, which may lead to losses by
investors or to securities litigation.
The market price of our common stock has been highly volatile in the past,
and our stock price may decline in the future. For example, as of November 3,
2004, the 52-week price range for our common stock was $6.96 to $16.59 per
share.
34
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
In addition, in recent years the stock market in general, and the market
for shares of high technology stocks in particular, have experienced extreme
price fluctuations. These fluctuations have frequently been unrelated to the
operating performance of the affected companies. Such fluctuations could
adversely affect the market price of our common stock. In the past, securities
class action litigation has often been instituted against a company following
periods of volatility in its stock price. This type of litigation, if filed
against us, could result in substantial costs and divert our management's
attention and resources.
Any future business acquisitions may disrupt our business, dilute
stockholder value, or distract management attention.
As part of our ongoing business strategy, we may consider acquisitions of,
or significant investments in, businesses that offer products, services, and
technologies complementary to our own. Such acquisitions could materially
adversely affect our operating results and/or the price of our common stock.
Acquisitions also entail numerous risks, including:
o difficulty of assimilating the operations, products, and personnel
of the acquired businesses;
o potential disruption of our ongoing business;
o unanticipated costs associated with the acquisition;
o inability of management to manage the financial and strategic
position of acquired or developed products, services, and
technologies;
o inability to maintain uniform standards, controls, policies, and
procedures; and
o impairment of relationships with employees and customers that may
occur as a result of integration of the acquired business.
To the extent that shares of our stock or other rights to purchase stock
are issued in connection with any future acquisitions, dilution to our existing
stockholders will result and our earnings per share may suffer. Any future
acquisitions may not generate additional revenue or provide any benefit to our
business, and we may not achieve a satisfactory return on our investment in any
acquired businesses.
Compliance with new regulatory and accounting requirements will be
challenging and is likely to cause our general and administrative expenses
to increase and impact our future financial position and results of
operations.
In order to comply with the Sarbanes-Oxley Act of 2002, changes to listing
standards recently adopted by NASDAQ, and attestation and accounting changes
required by the Securities and Exchange Commission, we must document, test and
improve our internal controls. This has necessitated that we utilize outside
accounting and advisory services, which will cause our general and
administrative expenses to increase. Proposed changes in the accounting rules,
including legislative and other proposals to account for employee stock options
as a compensation expense among others, could materially increase the expenses
that we report under generally accepted accounting principles and adversely
affect our operating results.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates to our
investment portfolio. We do not use derivative financial instruments in our
investment portfolio. We place our investments with high credit quality issuers
and, by policy, limit the amount of credit exposure to any one issuer. The
portfolio includes money market funds and other securities classified as cash
equivalents, which trade in the secondary market. All securities in our
portfolio are highly liquid. We have no cash flow exposure due to rate changes
for cash equivalents, as all of these investments are at market interest rates.
The table below presents the fair value of principal amounts and related
weighted average interest rates for our investment portfolio as of September 26,
2004 (in thousands):
Fair Value at
September 26,
2004
-------------
Assets:
Cash and cash equivalents .......................... $ 80,489
Average interest rate ........................... 1.46%
Restricted cash .................................... $ 510
Average interest rate ........................... 0.49%
Foreign Currency Risk
We are a United States, or U.S., dollar functional currency entity with
non-U.S. subsidiaries. We have an active foreign currency hedging program to
mitigate the currency exchange risks associated from various third party
transactions. This hedging program is managed and administered at our corporate
headquarters by our treasury staff and outside consulting is hired as needed.
Hedging of the European EURO and the Japanese Yen transactions have been made by
placing forward exchange contracts in the month of the initial exposure. The
hedge positions are marked-to-market at the end of each month until the actual
settlement of the underlying transaction is consummated and the forward contract
is closed. Unrealized gains and losses are recorded as an offset to other
comprehensive income. Realized gains and losses are booked to the condensed
consolidated statement of operations. We do not engage in any forward contracts
for speculative trading purposes. We enter into spot foreign exchange trades to
meet third party payment requirements and for operating funding requirements for
non-U.S. subsidiaries.
The following table provides information as of September 26, 2004 about us
and our subsidiaries' derivative financial instruments, which are comprised of
foreign currency forward exchange contracts. The information is provided in U.S.
dollar and EURO equivalent amounts, as listed below. The table presents the
notional amounts (at the contract exchange rates), the weighted average
contractual foreign currency exchange rates, and the estimated fair value of
those contracts (in thousands, except for average contract rate):
Average Estimated
Notional Contract Fair
Amount Rate Value
-------- -------- ---------
Foreign currency forward sell exchange contracts:
Mattson Technology, Inc. (U.S. dollar equivalent amount)
Japanese Yen............................................. $ 558 110.7 $ 556
European Euro............................................ $ 2,071 1.22 $ 1,105
Foreign currency forward buy exchange contracts:
Mattson Technology, Inc. (U.S. dollar equivalent amount)
European Euro............................................ $ 3,990 1.22 $ 4,039
The local currency is the functional currency for all foreign operations.
Accordingly, all assets and liabilities of these foreign operations are
translated using exchange rates in effect at the end of the period, and revenues
and costs are translated using average exchange rates for the period. Gains or
losses from translation of foreign operations where the local currencies are the
functional currency are included as a component of accumulated other
comprehensive income (loss). Foreign currency transaction gains and losses are
recognized in the consolidated statements of operations as they are incurred. To
help neutralize our U.S. operation's exposure to exchange rate
36
volatility, we keep EUROS in a foreign currency bank account. The balance of
this bank account was approximately 0.6 million EUROS at September 26, 2004.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and
chief financial officer, conducted an evaluation of the effectiveness of our
"disclosure controls and procedures" (as defined in Exchange Act Rule 13a-15(e))
as of the end of the period covered by this report. Based on that evaluation,
our chief executive officer and chief financial officer concluded that our
disclosure controls and procedures were effective as of the end of the period
covered by this report.
Our work to implement and improve our consolidation and enterprise
resource planning systems continues as an active project. It should be noted
that any system of controls, however well designed and operated, can provide
only reasonable, and not absolute, assurance that the objectives of the system
will be met. In addition, the design of any control system is based in part upon
certain assumptions about the likelihood of future events.
Changes in Internal Control Over Financial Reporting During the Quarter
Our management, with the participation of our chief executive officer and
chief financial officer, also conducted an evaluation of our internal control
over financial reporting to determine whether any change occurred during the
third quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting. Based on that
evaluation, our management concluded that there was no such change during the
third quarter of 2004.
Sarbanes-Oxley 404 Compliance - Changes in Internal Control in the Fourth
Quarter
Rules adopted by the Securities and Exchange Commission to implement
Section 404 of the Sarbanes-Oxley Act of 2002 (the "Rules") require us to assess
the design and operating effectiveness of our internal controls over financial
reporting and to include in our Annual Report on Form 10-K for the year ending
December 31, 2004 (i) a report from our management as to the design and
operating effectiveness of those controls, (ii) a statement that our registered
independent auditors have issued an attestation report on our management's
assessment of internal control over financial reporting and (iii) a copy of the
registered independent auditors' attestation report.
In order to achieve compliance with the new Rules within the required
timeframe, we have been conducting a process to document and evaluate our
internal control systems and procedures since early in 2004. In support of this
effort, we adopted a detailed work plan, dedicated internal resources and
engaged outside consultants to: (i) assess and document the adequacy of internal
control over financial reporting; (ii) take steps to improve control processes
where required; (iii) validate through testing that controls are functioning as
documented; and (iv) implement a continuous reporting and improvement process
for internal control over financial reporting.
Early in 2004, in parallel with our plans to document and evaluate our
internal control systems as required by the Rules, we also determined that we
should implement a new enterprise resource planning, or ERP, system as part of
ongoing efforts to improve our management information and financial reporting
systems, procedures and controls. The implementation has been done in phases. In
the latest phase, we switched our Fremont headquarters over to the new ERP
system in October of 2004. The new ERP system affects a significant number of
our internal controls and procedures. Following the latest implementation phase,
all of our affected processes and control activities need to be re-documented,
evaluated and tested by management. Then our registered independent auditors
need to review the new documentation, and perform evaluations and tests of the
affected activities. If control deficiencies are noted, we will need to
implement appropriate remediation activities. Any remediated controls would need
to be put into operation for a period of time, and then re-tested in order to
determine whether they operated effectively at year end.
Because of the limited time remaining in 2004 to complete these
activities, there is a significant possibility that our management, and
therefore our independent auditors, may not be able to complete their assessment
in the permitted time. If that happens, our management may not be able to issue
the required report on the effectiveness of our internal controls over financial
reporting, or our auditors may issue an adverse opinion, or disclaim an opinion,
relating to the attestation requirements of Section 404. Our registered
independent auditors have delivered a letter to the Chairman of our Audit
Committee emphasizing to us their concern over this situation.
37
The requirements of the Rules are new, and we cannot be certain what
consequences there may be if, despite our efforts, we or our auditors are unable
to timely complete the assessment of our internal controls or comply with the
Rules.
38
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of business, we are subject to claims and
litigation, including claims that we infringe third party patents, trademarks
and other intellectual property rights. Although we believe that it is unlikely
that any current claims or actions will have a material adverse impact on our
operating results or our financial position, given the uncertainty of
litigation, we cannot be certain of this. Moreover, the defense of claims or
actions against us, even if such claims or actions are not meritorious, could
result in the expenditure of significant financial and managerial resources.
There have been no developments in the pending cases during the third
quarter of 2004 that are material to Mattson.
Our involvement in any patent dispute, or other intellectual property
dispute or action to protect trade secrets and know-how, could result in a
material adverse effect on our business. Adverse determinations in current
litigation or any other litigation in which we may become involved could subject
us to significant liabilities to third parties, require us to grant licenses to
or seek licenses from third parties, and prevent us from manufacturing and
selling our products. Any of these situations could have a material adverse
effect on our business.
ITEM 6. EXHIBITS
Exhibit
Number Description
-------- ---------------------------------------------------------------------------------------
3.1(1) Amended and Restated Certificate of Incorporation of the Company.
3.2(2) Third Amended and Restated Bylaws of the Company.
31.1 Certification of Chief Executive Officer Pursuant to Sarbanes-Oxley Act Section 302(a).
31.2 Certification of Chief Financial Officer Pursuant to Sarbanes-Oxley Act Section 302(a).
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.
- ----------
(1) Incorporated by reference from Mattson Technology, Inc. Current Report on
Form 8-K/A filed on January 30, 2001.
(2) Incorporated by reference from Mattson Technology, Inc. Quarterly Report
on Form 10-Q filed on August 14, 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MATTSON TECHNOLOGY, INC.
------------------------
(Registrant)
Dated: November 5, 2004
By: /s/ DAVID DUTTON
-------------------------------------
David Dutton
President and Chief Executive Officer
(Principal Executive Officer)
Dated: November 5, 2004
By: /s/ LUDGER VIEFHUES
--------------------------------------
Ludger Viefhues
Executive Vice President - Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
40